After all, how many individuals do you know who turned into millionaires by investing in bank fixed deposits? None, right? On the other hand, we all have heard inspiring stories of individuals making moolah from the stock markets through smart investing strategies.
Adding the first stock to your investment portfolio may not be as easy as maybe making a fixed deposit at your preferred bank. There are over 7000 companies listed on the stock exchanges in India. You cannot just buy any random stock and expect to get lucky. The market doesn’t work like that, and stock investing must not be treated like a gamble (ever!). There has to be some rationale behind investing in particular stocks.
Beginners often are tempted to have their fingers dipped in the stock market as quickly as possible, and in the process, they tend to make uninformed decisions.
The idea behind stock investment is to put your savings to work at a quick rate while you are busy with your occupation. According to ace investors, keeping your money idle is a sheer waste of this precious resource. Your money should be at work at all times, even when you sleep, and if there is an opportunity that will earn you higher interest than fixed-income investment, then why not?!
Stock investing is essentially done to harness the growth of those companies that are performing impressively and are expected to flourish in the years to come. With the growth of the companies, their share price may also soar, and your investments will toe the line.
If you plan to have a fruitful stay in the stock market and generate some handsome returns on your capital, your entry to the stock market should be routed through the right channel. Here are 6 simple steps to get you started.
The first step in your investment journey is to step up the basic requirements, which involve opening a Demat account. A Demat account is your trading account where you can hold securities in a dematerialized format.
It hardly takes 15 minutes to open a Demat account! It’s a painless and quick process.
But what’s tricky, though, is selecting the right broker to handle your Demat account. With so many brokers operating in this competitive landscape, it’s hard to differentiate and pick the most suited one. Here are a few tips for you to make an informed decision:
- Look for the track record and credibility of the brokers.
- Compare the fees, brokerage, and other charges charged by brokers.
- Check the customer services offered.
- Check for the availability of training facilities for new investors.
- Compare the accuracy of advisory and research facilities
- Ask for other investment modes offered, like mutual funds, ETFs, bonds, debentures, etc.
- Ensure that there are no ‘hidden charges’
That said, your first broker doesn’t necessarily have to be your stockbroker for the rest of your life. In the future, if you feel like you made a wrong choice, you can switch your broker. You can even have multiple Demat accounts with different brokers.
Investing is not a one-day gig where you can come out with pockets full of cash in a couple of days. Easy money is a myth, and creating wealth by investing in stocks takes time and patience (Case in point: Warren Buffet’s life).
Investing can be mastered by setting up a plan for yourself. An interesting trick is to follow the ‘STICK’ method:
This involves setting aside a portion of your earnings every month that you can invest later on.
Keep following the latest developments about the companies you want to invest in. Also, keep track of the price action, as it helps determine entry points.
After accumulating decent savings, and figuring out the entry points, buy the stocks.
Investing shouldn’t be a far from few activities; you should always be proactive and look to add more stocks to your portfolio when they swing low and not when they are peaking.
Stocks are bound to experience phases of highs and lows, and there cannot be a straight line of growth. You should, however, learn to stay invested for as long as possible with a fixed stop loss, of course.
The quantum of investment will vary from person to person, and there is no standard amount required to start investing.
Prices of individual stocks vary and range from a couple of rupees and can also have a value in thousands. You can also look into mutual funds and start a SIP, where a specified amount is debited from your account every month and is systematically invested. Thus, it’s not about how much capital you need to start investing but how much you should invest.
The amount you can invest depends on a lot of factors. This majorly includes your financial responsibilities, as well as your risk appetite. At a young age, with less financial burden and a high risk appetite, you may choose to invest a higher amount in stocks. Entering early also gives you ample time to recover from any negative fluctuations in the market as your money compounds.
The popular rule of thumb, called the ‘100 – age’ rule, is devised to give you an idea of the percentage of savings that you can invest in stocks. According to this rule, subtracting your age from 100 gives the percentage amount that you can allocate to investing in stocks.
For example, if you are 25 years old, you can invest 75% (100-25) of your savings in stocks. The idea is to have more equity allocation when you are young because the amount will be invested for a longer duration.
Still, no such rule is binding, and you can take your own call according to your risk profile.
Now that you have set up your Demat account, it’s time to get going with buying stocks and making your first investment!
But remember, investing is a game of patience. Don’t just bid on any stock you have heard of right away. Instead, write down all the companies you find worth investing in and observe their price action for a couple of trading sessions to get an idea of their performance.
Next, you should learn to understand the fundamentals like growth and financial performance, and knowing about technical information like chart structure and candle pattern formation is a bonus.
When it’s finally down to buying, take a moment and make sure you are not buying the stock purely based on emotions. Do not buy a stock simply because there’s a lot of hype about it.
Stock markets involve quite some technical jargon that can leave you confused. You may be flummoxed to spot the terms like ask price, bid price, market order, limit order, stop loss and more when you open the order page of your Demat account.
Each of these terms is important when placing a buying/selling order, and erring might result in losses. Let us briefly know each of these terms:
- It is the price at which sellers are willing to sell the stock. Thus a buyer should bid a price either equivalent to or lower than the ask price.
- It is the price at which buyers are willing to buy the stock. Thus a seller should ask for a price either equivalent to or higher than the bid price in order to maximize their profits.
- It denotes the difference between the highest bid price and the lowest ask price for any stock.
- A market order gets executed at the best available price at the moment when you place the order.
- In a limit order, you get the option to decide the price at which you are willing to buy. Your order will only get executed if the security is traded at your limit price during the session.
- In case things turn ugly, stop loss is used to limit losses. You can set a stop loss at the price where you want all your loss-making positions to be automatically squared off.
Managing portfolios is not necessarily rocket science, but it does require some level of market expertise. Ace investors always advise you to hold onto your investments for as long as you can, unless something goes fundamentally wrong with the company you had chosen and there is remarkable capital erosion. One should know when to exit stocks without getting emotionally attached to them. Let’s get to that at a later stage.
Once you settle into investing, you should add stocks from diverse sectors into your portfolio. Doing so will ensure the stability and sustained growth of your portfolio. Rebalancing the portfolio by removing stocks where your target is achieved or replacing ones that aren’t performing to expectation and adding fresh investments should be done regularly.
Moreover, you must always look to average out your investments. For example, you have made up your mind to invest Rs. 10,000 in shares of Coal India Ltd. Make sure you don’t invest the whole of Rs. 10,000 in one go. Invest 20-30% initially and look to average out your remaining investment at every dip you see in the stock price. For this, if you see a dip in the price of the shares of the company you initially invested 20-30% of your corpus in, purchase a few more shares. With this, your total investment in that company increases. When you divide this total investment with the number of total shares you now hold, you will get the average price of your investment. This will be lower now, because you purchased additional shares at a lower price. This eliminates the chances of getting trapped at higher price levels.
During extreme market situations like wartime or economic turmoil, when markets are expected to fall, hedging of the portfolio can be done to negate wealth erosion.
Contact TejiMandi for professional portfolio management services and ensure your investments are being wisely managed and monitored for optimal returns.
With your maiden stock investment, you step into the investing world that offers limitless opportunities. You must remember that investing is a long-term game, and you can always bounce back stronger. Follow these 6 steps to seamlessly invest in stocks. Always remember that experts at are with you at every step of the way. In case of advice, visit our website and reach out to us!