What to know before you begin investing in the stock market?

Making stock market investments as a beginner can seem intimidating but not if you have the right information and guidance.

What to know before you begin investing in the stock market

Savings are great for a rainy day or an unforeseen pandemic such as COVID-19. Investments, on the other hand, are even better, because they make your money work for you. With the economy tanking as a result of the global pandemic, job losses and pay cuts are becoming the new normal. Your investment portfolio can come in handy at a time like this, when your monthly income is reduced or uncertain. After all, bills and EMIs still need to be paid. 

If you haven’t built one yet or never taken investing seriously before, that’s okay – better late than never! While investing can seem overwhelming or intimidating in the beginning, you’ll learn as you go along and soon get the hang of what works for you. Nonetheless, to help you get started, here are some helpful tips for beginners on how to invest in the stock market. 

1. Set long-term goals

Everything starts from here. Before you even look at various investment options, you need to ask yourself what your long-term life goals are and then determine your long-term financial goals. Depending on your age, life phase, and financial position, this could range from buying a home to paying off your education loan. You should also know by when you need to fulfil this goal, or the time period. That will allow you to determine how much time you have for your investment to grow – and accordingly, decide which avenue is the best for your capital. 

The growth of your investment will depend upon three crucial and interconnected factors:

  • The money you invest
  • The returns on your investment 
  • The time you invest for 

Pro tip: Most stock market investment websites have online calculators that help you determine your investment growth based on the above factors. For instance, for SIP, there are SIP calculators. Many of them also adjust the numbers for inflation to give you a clearer idea.

Related: Important things to know before investing in the stock market

2. Understand your risk tolerance

Other than your long-term goals, appetite for risk is a factor you should consider. It’s primarily based on your personality and natural disposition. Are you somebody who likes taking risks without worrying yourself sick, or do you like to err on the side of caution? A bit of introspection about your personality and behaviour will help you answer this. 

Some other factors that influence your risk tolerance when it comes to investing are:

  • Age
  • Income
  • Financial obligations and dependents 
  • Debt and other liabilities 
  • For instance, if you’re in your 20s and live with your parents and only have to manage your personal expenses (but not things like EMI and rent), your financial obligations are very few and you have age on your side. 

Pro tip: You’ll have to take your personal circumstances into account. Just because you and another person are of the same age and draw the same income, it doesn’t mean your risk tolerances will be the same. Also, this is an area where you will know yourself better after you begin investing. 

3. Control your emotions

Before you begin investing, you may think that people invest in a very objective and scientific way by analysing the performance and numbers and then making prudent decisions. You may be surprised to find that’s often not true. Emotions tend to get the better of people when investing and there’s a lot of speculation, rumour, and anticipation – which might explain why the stock market is so volatile. 

There are essentially two broad kinds of investors:

  • Investors who have a negative outlook regarding the market are called bears. A bear market is characterised by prices going down and investors being fearful. 
  • Investors who feel positive about the market are called bulls. A bull market is characterised by a rise over a period when the economy is strong, with investors remaining optimistic. 

Pro tip: You will be faced with a lot of questions – which stocks to buy, when to sell, how to maximise profit, etc. – and while your first instinct may be to make these decisions based on emotions, you need to keep reminding yourself to be rational. Before you invest in anything, you will need to know why and have a clear exit strategy as well. 

Related: Looking for a stock broker? Here’s a complete guide for beginners

4. Educate yourself on the basics

When you travel to a new country, you look up information about it, such as places to visit, food to eat, cultural pointers, etc. You do your research well in advance, so when you’re there your trip goes smoothly. The same applies when you want to begin investing in the stock market. You may know this already, but if you’re wondering where to begin, here are some good starting points:

  • Familiarise yourself with some basic investing terms, such as stop-loss, and financial metrics like financial ratios. 
  • Understand some common methods for selecting and analysing stock market investments, as well as the timing. 
  • Talk to people in your social circle who have been investing for a while – not for advice but for perspective. 

While it’s true that you will learn most of what you need to know along the way, it’s smart to have some background so that your initial investing mistakes can be kept to a minimum. 

Related: 7 Mistakes to avoid when choosing online stock brokers

Pro tip: Avoid the practice of ‘leverage’. Leverage in investing means using borrowed money to invest and build your investment portfolio. Typically, banks and brokerage firms facilitate this. It’s an investing tool, which is neither good nor bad. But when you're starting out, you shouldn’t go for it or rely on it because it can push you into debt.

If you’re wondering whether you should start investing now with the pandemic on, the simple answer is yes. Investing is never a bad decision – you just need to figure out what investments are strategic, given the time and situation. For instance, investing in gold is a great option right now, as is starting an SIP. Clueless about investing in stock markets? Here are some options.

Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.

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