How Should First Time Investors Invest in The Stock Market?
There is a famous saying “Be fearful when others are greedy and greedy when others are fearful”. If one is a first time investor he faces a sea of emotions when investing in the stock market. There is excitement at taking the first step .There is greed to double the investment in a short span of time. There is also an unnamed fear of the what if factor. What if I lose heavily in the stock market?
The art of investing in the stock market
Buy stocks in small quantities
- A journey of a thousand miles begins with a single step. If one is a first time investor he needs to start small (small sums of money) or use a demo portfolio available online to get a feel of investing in the stock market.
- One gets a feel of investing using the demo portfolio and gets an idea of the stock price movements as well as the returns these shares generate over a period of time.
- This gives one confidence to put in his hard earned money into stocks albeit in small quantities.
Set your finances in order
- One should invest in stocks only out of his surplus and not his children’s education money or the family food cash. The school can’t wait till one collects cash to pay the fees and one has to eat every day.
- One should pay off all debts before investing in the stock markets. Remember “ A small hole can sink a great ship”. Debt is basically spending tomorrow’s money today .Clear all debts before investing in the stock markets.
- Before investing in the stock market one needs to set aside money for his living expenses. An emergency fund needs to be created for at least 6 months worth of expenses for say a medical emergency.
- One must invest only money he can afford to lose otherwise it would be difficult to sleep at night.
Do your research
- One needs to study the Company he plans to invest in. Do your research. Study the Company and the products it sells.
- Study the management and the promoter’s holding pattern. A high promoter holding states that the control of the Company rests with the management. The top management makes most of the decisions and runs the Company.
- A huge public holding signifies decision making ability with other financial institutions rather than the Company board.
- Study the Company business and its product line. Do its products have demand? Do its products have a competitive edge vis-a-vis its rivals?
- One needs to study the Company financials and past historical data on the stock price movements.
- One needs to go through all the news and announcements made by the Company.
- Check and see if any prominent mutual funds have invested in this Company. Mutual fund have access to large sources of information and good portfolio managers. They would seldom make a mistake with their investments.
Diversify your investments
- One must diversify his investments into different industrial sectors in order to cut losses in difficult and volatile times. Invest in energy, pharmaceuticals, information technology oil and gas or even FMCG to avoid risk.
- When one sector does not do well another sector outperforms and a balance is maintained on the investments. This protects one’s portfolio from volatility at all points in time.
Do not try to time the market
- There is a famous saying “ An investor needs to behave consistently as an investor and not as a speculator”.
- Jumping in and out of the market is not an investor’s cup of tea .If one is an investor he needs to stay invested at all points in time and not exit the stock market in a recession or a crash.
- Spending time in the market is the best way to avoid volatility as trying to buy low and sell high is dangerous for a first time investor.
Monitor the portfolio
- Can one just purchase stocks make a portfolio and let it lie without monitoring its performance? No of course not. This is similar to setting a ship adrift in the sea without a sail or a rudder.
- One needs to perform corrective action whenever the portfolio goes off track by selling shares which have remained at the same level for many months, are not fundamentally sound and whose future prospects are dim.
- One needs to use the funds obtained on selling the substandard shares to purchase fundamentally strong blue chip stocks or undervalued stocks (Good quality stocks whose value has not yet been discovered by the general public) and enhance his portfolio.
- Many first time investors believe that buying large quantities of stocks of Companies valued at lesser prices in the best way to invest in the stock market.
- More the merrier seems to be the motto and large quantities of cheap stocks get dumped in one’s portfolio.
- The first question a new investor in the stock market needs to ask himself is Why is this stock cheap? Many a time Companies are undervalued because their positive attributes have not yet been detected by the investing public.
- It might also be true that a Company might be debt heavy (Too much of debt in its books) or its products are not selling. A Company could be facing union issues or involved in regulatory issues.
- This could be the reason why its shares are available at cheap rates and buying huge quantities of these shares results in a severe loss.
Never invest on rumor or a hot stock tip
- Finding the next big thing much before anyone can even dream about it is the holy grail of investments.
- One invests on rumor “ This technology is the next best thing and the Company which sells these products will have a monopoly in the market”. This product will be a best seller.
- Hot tips and rumors have lead many a new investor into a death trap. At best they could be some truth in that rumor but most of the time one’s investments are stuck in the wrong product or Company and the losses are heavy.
- Invest only in Companies or products you can understand and keep emotions even “Hope” out of the game.