How to Invest in the Stock Market – For Beginners
If there is any positive outcome of the pandemic, it is awareness about investing – specifically equity investing. Thanks to the market rally post-March 2020, easy access to online trading, and democratized stock research, people are jumping into equity markets like never before. Even the highly risk averse retail investors have warmed up to the idea of direct equity investing.
That said, stock market is not a bed of roses. Whether to gain exposure to equities directly or through mutual funds is an eternal debate. I cannot deny that equity investing has a lot of advantages and thrills, but direct investing is not for everyone. Short-term gains and initial ecstasy will fizzle out one day, and you may have to face the hard truth. There are a lot of questions that you need to answer before you take the plunge into direct stock investing. It will only help you to understand your readiness for this route better:
Here are five of these questions:
1-Do you have enough patience?
It would be an understatement if I said that patience is the key to winning the stock market game. If you think that buying a stock on Monday and selling it Friday is the way equity investing functions, it is a big misconception. To reap real return from equities, you need to stay invested over the long-term. Stock markets may be subject to a lot of volatility in the short-term. The power of compounding over a sustained period will even out these fluctuations and protect your investment.
When I say long-term, the tenure can be as long as ten to twenty years. Hence, you need to have a lot of patience and a sense of discipline for equity investing. Moreover, once you invest, you would also need patience to review your portfolio periodically and check if you are on the right track.
2-Do you have access to critical information ahead of the market?
If you want your portfolio to outperform the market, you must act ahead of it. This can only happen if you are privy to a piece of price-impacting information that is not in the public domain. Once, the market access that information and the stock price discount it, your chances of earning that extra profit reduces. So, the trick is to always be on toes, identify offbeat but critical information, and act upon it before others do. This strategy is technically known as Information Arbitrage. However, a catch here is to judge the authenticity of such information. Given the deluge of news on digital media, it is best not to pick the fake ones.
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3-Can you show emotional restraint when market crashes?
It is very easy to stay motivated during phases of uptrend, but when markets crash, you might hit the panic button. Stock markets can indeed be a roller-coaster ride, and you know that. However, when things go wrong in reality, you may tend to get swayed by negative emotions and liquidate all your holdings. Later, you may realize it was a mistake. Thus, a good investor needs to show a control over negative emotions at this point. It may be challenging to do so but emotional restraint and unwavering focus on long term prospects of a stock always pays.
4-Do you have the time to research a stock well?
You cannot pick the right stock by following intraday tips and random stock recommendations. Before you invest in a company, you need to invest a lot of time in researching about its historical performance, current situation as well as future prospects. For this you will have to read the company’s annual reports, press releases, earnings call transcripts, analyst reports, and many more sources. You also need to pay special attention to all the risks that the company is exposed to.
5-Do you have a strategic plan for building a portfolio?
Many retail investors who take the direct equity investing route just pick one or two stocks at random. While it is a good place to start with, lack of planned approach might eventually expose you to a lot of risks. Hence, the ideal strategy is to create a diversified portfolio wherein you have a portfolio of stocks that belong to various sectors that are uncorrelated. This way the risks will be widely distributed and your portfolio will stay resilient during unfavourable events.
It’s praiseworthy that equity investing has caught your attention and you want to gain from the stock markets. However, before you begin to invest in stocks directly, a bit of introspection and reality check will ensure your success. If you can answer the above questions in positive, then direct stock investing is for you. However, if you are doubtful about a few of them, you can still gain exposure to equities, but through mutual funds or ETFs. That said, you can also spend time to learn the ropes of direct stock investment and then take the plunge.
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