What is the role of financial advisors in stock investing?

role of financial advisors in stock investing

Stock investing is gaining popularity among many new and aspiring investors in India. According to the data published by CDSL and NSDL, active investment accounts jumped by 10.4 million in the year 2020. Moreover, retail ownership of stocks listed on the National Stock Exchange (NSE) increased to 9% in the third quarter of 2020.

The potential of attractive returns and the lure of owning a part of leading companies drive many investors to the stock market. But can they navigate the volatile stock market alone?

The stock market is a technical and complicated platform. Even though buying and selling stocks look straightforward, it is not exactly that simple. Every time you buy or sell a company’s securities, the trading decisions you make must be backed with proper research and strategy to derive profits. ‘Mr. Market is quite moody,’ as the father of investing, Benjamin Graham, described it in his book Intelligent Investor. Market movements are heavily influenced by human sentiments that can be unpredictable. This is where many investors might face challenges. In such situations, financial advisors can come to your aid.

Who is a financial advisor?

A financial advisor is a professional that has the required financial knowledge and expertise to help you with financial management, which may include assessments, streamlining savings and expenditure, advice on suitable products for investment, portfolio management, taxation and more.

Financial advisors possess the academic and regulatory qualifications to assist investors. Some advisors may offer specialized services from within the financial management space, such as retirement planning, tax planning or investment planning, and some may specialize even further with service offering such as stock investing advice.

Trusted by 10,000+ investors, the experts at Teji Mandi are experienced Sebi Registered Research Analyst who will help you filter out the best investments for you. To seek out active advice from our team, reach out to us through our website!

Let us understand the role of financial advisors in stock investing in detail.

Role of financial advisors in stock investing

Financial advisors play multifaceted roles in stock investing. These include the following:

1- They help in planning your finances

When you engage the service of a financial advisor right from the start, you can start your financial journey on the right foot. With their expertise, financial advisors help you chart out your finances to assess your risk profile and investment needs. They list down your expenses, incomes, assets and liabilities. Then, they estimate the amount of savings that you have at your disposal that you can direct towards stock investing.

Financial advisors help in determining the part of your income that can be allocated to stock investing so that the other investments that you might have do not suffer.

2- They educate you about the inherent risks

The stock market is a risky platform. The prices of stocks fluctuate every second that the market operates. This is because the stock market works on market perceptions, economic movements, happenings in the international markets, and the forces of demand and supply. This can bring about considerable swings within the same day and cause tremendous fluctuations. These fluctuations may be positive or negative.

Financial advisors know of the volatility risks inherent in stock markets and have enough experience in dealing with them. They can, thus, educate you on the same. Moreover, they help you invest in the market based on your risk appetite. If you are an aggressive risk-taker, financial advisors motivate you to invest a larger part of your income in the stock market. On the other hand, if you are risk-averse, they try to limit your stock investing so that you can tolerate lows.

3- They conduct fundamental and technical analysis of potential stock additions to your portfolio

What differentiates a successful stock investor from an unsuccessful one is the companies they choose to invest in. As of 2021, there are more than 1600 companies listed on the National Stock Exchange alone. Add in the Bombay Stock Exchange, and the stock choices increase considerably. Financial advisors help you in this respect.

Choosing stocks is not a small task. You should look into the fundamental and technical details of the company before you put your money in. This fundamental and technical analysis requires knowledge and understanding of stock charts, metrics, and the company’s balance sheet. Financial advisors have the knowledge to analyse the seemingly incomprehensible numbers. They can conduct a thorough analysis of the stocks to shortlist those that have the potential to deliver high returns.

To know more about how you can do this, read our A-Z guide on analysing stock fundamentals on the Teji Mandi blogs!

4- They help you choose the right stocks, at the right time

  • There are three main types of stocks in the market:
  • Large-cap stocks belong to large enterprises that are well-established, with a market cap of Rs 20,000 crore or more.
  • Midcap stocks belong to companies that have scope for growth and have a market cap between Rs 5,000 crore and Rs 20,000 crore.Small-cap stocks that belong to new and developing companies that have aggressive growth strategies and have a market cap of less than Rs 5,000 crore.

The risk differs across these stock segments. Large-cap stocks are said to be the least risky of the three, while small-cap have the highest risk. Midcap stocks, on the other hand, fall in the middle of the risk-o-meter.

Depending on your risk profile and after conducting thorough research, financial advisors recommend the right stocks for your portfolio. Furthermore, they advise you on the right time to invest in the stocks, i.e., when they are trading at a comparatively lower price so that you can get larger quantities, fetching you better returns.

5- They help with portfolio diversification

Portfolio diversification is the key to maximize profits while minimizing risks. It means having shares of companies from different industries and sectors, having different market caps, or even a mix of different asset classes in your portfolio. Furthermore, in each asset class, you can opt for various investment options for diversifying your portfolio further.

Financial advisors understand the importance of diversification. As such, they advise and help you invest in many avenues. For instance, a diversified portfolio would contain a mix of stocks, mutual funds, fixed-income instruments, gold, and other investment options. Moreover, a diversified stock portfolio would contain stocks from all market caps (large-cap, midcap and small-cap) and also from companies engaged in different industries like pharma, energy, IT, construction, BFSI, etc.

Learn more about portfolio diversification in our blog on stock investing in India – what is diversification of portfolio here.

6- They help plan a corpus for your financial goals

Why do you invest?

The answer is simple – to grow your wealth and fulfil your financial goals.

Financial advisors first help you identify and priorities your goals. Thereafter, they help you plan a corpus for each goal that you might have, like buying a car, a house, sending your child to a foreign institution, planning for retirement, or taking an international trip.

Financial advisors ensure that you have earmarked investments to create a corpus for each identified goal. Moreover, they keep track of your portfolio and look for possible deviations. If there are any deviations, they take corrective measures to bring your investments back on track. They also help you re-evaluate your portfolio to make sure it aligns with any changes in your future plans.

7- They help in booking profits or cutting losses

Stock trading means spotting opportunities to generate a profit and acting on them. Since the stock market is highly volatile, you need to time your entry and exit from a stock. This is called timing the market, which requires accuracy and precision. This accuracy comes from experience and an understanding of the stock market. Financial advisors have both.

Financial advisors, thus, suggest the right time to buy a stock and also the right time to sell it. If the price of a stock has risen considerably and is expected to fall in the near future, financial advisors recommend selling off the stock to book your profits beforehand. On the other hand, if the stock price is falling with no redemption in sight, advisors recommend selling off the stock to cut your losses.

Thus, an important role of financial advisors is planning the investment in stocks so that you either benefit from maximum gains or manage to minimize your losses.

8- They give you tax advice

Lastly, tax planning is also the role of financial advisors. Stock trading attracts tax based on the time you sell your holding, making a profit or a loss. If you hold your stocks for 12 months or more, you become eligible for long-term capital gains tax. Gain up to Rs. 1 lakh is exempted from tax, while gains exceeding Rs. 1 lakh are taxed at 10%. On the other hand, for short-term investments, when you hold the stocks for less than 12 months, you are liable to pay short-term capital gains tax. In such cases, your gains are taxed at a flat rate of 15%.

To know the details of how investments are taxed, read our blog on taxes on investments here.

Financial advisors educate you on the tax implications of your investment. They can calculate your tax liability and also motivate you to avail of the benefit of long-term capital gains by holding onto your investments for at least a year.

In conclusion

Financial advisors play an important role in stock investing. They can become your guide and mentor and help you trade using their expertise and knowledge. Registered and verified financial advisors come under the ambit of sound stock advice, and it is not considered unsolicited advice that you must avoid at all times when you invest in stock markets. Always reach out to such financial advisors for qualified stock advice. Heeding such advice when making trades may help you earn attractive returns and also help you steer clear of possible stock investing mistakes. Note that all advice nonetheless carries some elements of risk, and the investor needs to be prudent about it.

While it is true that financial advisors charge for their services, the charge is nominal compared to the multiple roles that they play in stock investing. So, take the help of qualified and reputed financial advisors when beginning your journey into stock trading.

Professionals at Teji Mandi can help you understand the intricate mechanisms of stock investing so that you can invest right. On the other hand, if you are an existing trader, we can help you make changes to better your overall portfolio through our premier portfolio management services. Call us today!

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