- Date : 27/01/2021
- Read: 6 mins
Though investing in the equity markets may seem a chancy proposition, following a few basic rules can help you thrive.
We often hear about millennials raking in the moolah and spending their money to lead a blatantly consumerist lifestyle. However, you might be surprised to know that millennials are not as careless with money as many imagine. In fact, many of them are turning out to be prudent investors.
For instance, according to CAMS (India’s leading transfer agency), 47% of 3.6 million new investors that it onboarded in FY 2018-19 were millennials. According to CDSL (India’s largest trading account depository), over 5 million Demat accounts were opened in the first nine months of 2020, and a substantial number of these were opened by millennials.
The rise in participation of millennials in the equity markets can be attributed to:
- Access to affordable internet
- The proliferation of mobile devices, including smartphones
- Availability of tremendous information related to investing and trading in stock markets, especially in regional languages
- The emergence of discount brokerages
- Low-interest yields offered by conventional saving instruments such as fixed and recurring deposits
Related: Where And How Do Millennials Invest?
However, despite this, many millennials still struggle with investing in the equity market. Here are some handy investing tips for them to get the best out of their stock market investing journey:
1. Have a plan in place
It is essential to create a plan to develop your investing strategy. Goal-based investing is one such plan. Goals can be divided into short-term, medium-term, and long-term. Short-term goals (say, buying a new laptop or taking a vacation) can be met in a year or two. Medium-term goals (say, purchasing a car or creating a corpus for funding higher studies) can be achieved within 3-5 years. Long-term goals (say, a corpus for the down payment of a new house or for post-retirement needs) can take a decade or more.
Do keep in mind that these goals and time frames are indicative. You may have your own opinions when it comes to these goals, and the time you will need to achieve them. Your investing strategy should be aligned with these goals.
2. Don’t be tempted to overinvest
Markets are volatile and susceptible to daily movements in either direction. There could be times when your invested capital loses its value. However, the amount of money you have invested should be such that you don’t lose sleep over it. So, invest only an amount you are comfortable with; don’t be tempted to pump in funds if you see the markets going up.
3. Invest only in strong stocks
If you are investing in mutual funds, you will have a professional fund manager picking stocks for you. However, if you are investing directly in stocks, consider investing in fundamentally strong stocks rather than getting swayed by the temptation of investing in penny stocks, or stocks whose financials seem questionable. Some factors you could consider are P/E ratio, price-to-book value, debt-to-equity ratio, operating profit margin, EV/EBITDA, price/earnings growth ratio, return on equity, interest coverage ratio, and current ratio.
4. Stay patient after investing
Once you have invested, relax and prepare yourself to stay in the game for the long haul. If you have invested in equities, be prepared to stay for 3-5 years. There may be instances when you feel like scalping some profits when the markets go up, or to withdraw funds when the stock prices tumble. Perish the thought! Investing in equities means sticking it out through ups and downs. Only then will you be able to get the full benefit of your investment. For example, if you regularly invest Rs 5000 per month for 20 years and are able to achieve a CAGR of 12%, your corpus would be worth Rs 50 lakh at the end of the investing period.
5. Do not follow the herd
Just because everyone is investing in a certain stock or equity does not mean that the stock or equity is particularly good. This often happens during a bull market, where newbie investors (and even experienced ones, in some cases) have a fear of missing out. Analyse the stock on your own and try to figure out specific reasons why it would work well or not. If your calculations and research show that the stock will do well in the near or distant future, go for it. If not, you should check out other options.
6. Treat social media with caution
The world of markets and investing are not immune to fake news. The burden is on you to find out what is true and what is not. Your social media feed may be flooded with news about stocks hitting the roof, M&As, or other market-related information. While some of these may be genuine, others could be planted solely to boost views. So do due diligence and check with multiple sources and trusted websites before taking a call.
7. Do your own research
Do not accept a stock tip on face value. Do your own research and analysis and come to an independent conclusion whether the stock is worth investing in or not. Just because a market guru offers a hot tip or a news channel recommends something, it does not need to be true. Understand why you are investing in a particular stock. This way, you can build the skill of understanding how the markets work and learn to pick the right kind of stocks.
Pro tip: When looking at stocks, make sure you look at the profits the company is making, the intent of the management, and the quality of the management.
8. Do not borrow money to invest
You might have come across stories of traders and investors borrowing funds - often from friends or family - to invest in the markets. Thanks to the proliferation of apps that can offer personal loans at the click of a button, you might want to do the same. Investing using leveraged capital may work for experienced traders or investors who have witnessed several market cycles, but not for those just starting off. If your investment or trade fails to offer you the desired results in a certain span of time, you could find yourself servicing high-interest loans for a long time.
It is a good idea to be well-versed with tools like Stock Screener and be a part of platforms such as ValuePickr. Before directing money into the equity market, be sure to create an emergency fund and purchase health insurance that covers you and your dependents.