Share Market Tips

The stock market has the potential to bring handsome returns to investors, especially over the long term. However, making money in the stock market may prove challenging for beginners who have little to no knowledge of how the market works. While there is no sure-shot formula for success, some practice on the market would help you to figure out the right investment strategy. Keep in mind that stock market investment requires patience, discipline, and a systematic approach to investing. Also, take note of basic share market tips which, if followed prudently, may help you to generate good returns. They could help you to make good investment decisions and prevent losses as well.

Here are a few of the important share market tips:

• Set Goals Before Investing

Goal-based investing can help you to work towards achieving your financial goals. Assess your financial needs and set your short-term and long-term goals accordingly. This will help you to identify the duration of your investment, the target amount, and the investment avenue most suitable for your needs. Say, your investment horizon is short. Then you could attempt to gain from short-term fluctuations in stock prices. On the other hand, should you have a longer timeframe, you could invest in blue-chip stocks, as they are known to bring good returns in the long run.

• Understand Share Market Basics

Before you invest your hard-earned money in the stock market, get familiar with the basics. Learn how the stock market functions, what drives the market, what influences stock prices, trading and investing strategies, and more. You will also need to get acquainted with the many technical terminologies to make informed investments. Investors who jump in without understanding the basics could end up losing their money. If you want good and consistent returns, learn about the market before starting your share market journey.

• Research And Conduct Due Diligence

Investors sometimes do not research the company they wish to invest in. Some do this because they lack the time or do not want to make the effort. Others may not know how to do the research. But conducting fundamental research and technical analysis are crucial steps for stock market investors. They can help you to book profits and avoid losses. So, how should you research a company before investing? Start by reading the company’s financial reports, assessing the competency of the board of directors, and looking into independent research on the company and its sector. This will help you to understand the future growth prospects of the company before investing.

• Select Fundamentally Strong Companies

You should consider investing in companies with strong fundamentals. Such companies not only provide enhanced returns in the long run but also ensure greater liquidity to investors. Fundamentally strong companies also have the potential to withstand share market volatility and fluctuations. Thus, they are a relatively safe avenue for investment. Mutual fund investors could also look into large-cap mutual funds.

• Do Not Buy Based On Rumours

One thing you should strictly avoid in the stock market is investing based on rumours. Do not simply purchase a stock simply because everyone is investing in it. Even if a friend or relative suggests the stock, don’t follow their advice blindly. Conduct proper research into the stock before investing. Analyse the performance of the company and its growth prospects. Always remember, good stocks offer good returns. Click here for a quick guide to investing.

• Define Profit Targets

Since the stock market is unpredictable and volatile, no one can correctly time market movements. Therefore, it is advisable that you determine your exit prices before investing in a particular stock. Once your profit target is reached, close your positions and book profits. It is often a bad idea to be greedy and wait for higher returns. The stock price could move against you at any time, which may lead to losses.

• Invest Through Reliable Intermediaries

To invest in the stock market, you have to open demat and trading accounts. You may find many brokers offering these services in the market, but it is advisable to invest through reputed and reliable intermediaries. You will then gain access to secure trading platforms, several value-added services, timely research reports, and share market tips. Choose an intermediary that offers responsive customer care so that your issues are resolved quickly and efficiently.

• Avoid Risky Low-Priced Stocks

Low-priced stocks, also known as penny stocks, attract investors because they seem like bargains. A given amount of capital will fetch you a much larger number of those low-priced shares. But such stocks often carry huge risks. Remember, a stock’s price does not provide any indication of how well it is likely to do. Instead, you should study its fundamentals before investing. Check its financial statements, debt–equity ratio, recent earnings reports, and other details. This will give you an idea of whether the company is stable or on the brink of collapse. Click here for tips on how to identify undervalued stocks.

• Understand Your Risk Tolerance

Risk tolerance is the ability to bear market fluctuations and their effects on the overall value of your investment. This is a subjective factor that varies from person to person. Whether a person has low or high risk tolerance may depend on their income, financial situation, investment portfolio, and expenses, among other things. Since the stock market is volatile, knowing your capacity to bear risk will help you identify suitable stocks to invest in. For instance, a conservative investor with a low risk appetite may be better served by investing in stable large-cap stocks. Meanwhile, someone with a high risk appetite could look to mid-caps and small-caps which carry some risk but also have a greater potential for growth. Here are five things you should know about stock market risk.

• Diversify Your Investments

As the saying goes, ‘Don’t put all your eggs in one basket.’ This is true with your investments too. You should avoid investing all your money in just one company or sector. Should the company or the sector perform poorly, your entire investment could be at risk. To avoid this situation, you should diversify your portfolio. Invest in stocks across different sectors. So, if one sector does not perform well, the sectors and companies that do well can counter the adverse impact. This helps spread your risk and reduce your losses.

Let’s consider an example: Say, you own stocks in five companies belonging to different sectors. In this hypothetical case, each company stock gets 20% of your total investment and the shares are priced the same. After some time, you find that two companies (Company A and Company B) perform very well and their stock prices go up by 25%. Two other companies (Company C and Company D) perform decently and their prices appreciate by 10%. However, the fifth company (Company E) has a bad run and its price declines by 20%. Here, diversification helps you cover the 20% loss from Company E, as all your other investments have seen price appreciation. This leaves you in a better position than if you had invested solely in Company E.

• Control Your Emotions

One of the biggest obstacles for stock market investors is the challenge of controlling their emotions. Emotional trading and investing often leads to illogical decision-making. Experts say that emotions have no role in the stock market. You should enter and exit a stock only when your target price is reached. Investors should avoid panicking and stressing during market swings.

• Use Stop Loss

If you are new to the stock markets, learn to trade using a stop loss. A stop loss is a pre-decided target that you can place on an order to restrict losses beyond a point. Stop loss triggers protect investors from incurring heavy losses and prevent the complete erosion of their capital by a few trades. They can also help you to overcome emotional trading decisions and, in turn, make you a disciplined trader.

• Be Careful About Leverage

Leverage means using borrowed funds to execute your stock market trades. Many traders invest in the stock market by borrowing funds from their broker. While leverage can help you to make bigger and potentially more profitable trades, they also carry some risk. As a safeguard, you should invest only what you can afford to lose. Set aside money for your regular and emergency expenses before allocating capital for your stock market investments.

Conclusion

The promise of good returns draws people to invest in the stock market. Just remember that the markets are volatile and stock prices can move in unpredictable ways. However, seasoned investors don’t let these risks affect their strategy. They focus instead on research and analysis to figure out whether to invest or not, where to invest, and whether to buy, hold, or sell a stock. If you are just starting out, the share trading tips provided above can help you take your first steps. Use them to set up an effective investment strategy that brings steady returns in the stock market.