Stock trading on the up amid the pandemic: A word of caution for young investors

If you’re a young investor who is new to the stock trading scene, here’s a word of caution.

October 20, 2020 8:24 IST | India Infoline News Service
The COVID-19 pandemic and the ensuing nation-wide lockdowns have managed to put a lot of people out of jobs and have reduced the income generating capacity of many families. As a result, many individuals turned towards stock trading in an attempt to make short-term gains using the price movements of stocks.

In fact, in the span of just two months, from March to April, 2020, around 12 lakh new demat accounts were opened. The retail investor trading volumes in the National Stock Exchange (NSE) have also seen a significant boost. This clearly signifies that stock trading has picked up nicely amidst the pandemic.

A major chunk of these new individuals entering the stock market was found to be made of young investors who were new to the trading and investment scene. Since they’re just beginners who are just starting their investment journey, they’re likely to be inexperienced with the ways of the stock market. If you’re a new and young investor, here are some things that you should know before you go about trading.               

Make sure that you pick up the right stocks
Wealth creation is all about trading and investing in the right companies. And so, always make sure to take your time and choose the right industry. Once you’ve chosen the industry, your next step is to pick up the right stocks. This involves exceptional amounts of research. Take an in-depth look at the company’s fundamentals, its past performance, its future growth prospects, and its competition.

Only invest your money in a company that has managed to satisfy you on all fronts since it is your hard-earned money that you’re using to trade. While you’re at it, stay away from low-value companies, also known as penny stocks. These might seem very attractive due to their low share prices, but more often than not, these companies are not very strong fundamentally. Also, they’re more volatile and prone to wild swings in price.
Don’t get too involved in stock trading
Unless you’re trying to make a career out of stock trading, you don’t have to get too involved in the activity. Being overly active in the stock market is likely to be more detrimental to wealth creation as it might lead you to overreact in some situations. Watching your portfolio every single day can also increase your stress levels and can push you towards bad decision making.

A much better way of approaching the stock market would be with a long-term view in mind. Once you’ve chosen the right company and invested in it, step back and relax. Have a time frame in mind and check back every week, every month, or every quarter to see how the company is doing. This way, you can disregard the short-term noise and wild price fluctuations, which can otherwise influence you to make wrong investment decisions.    

Avoid leverage
If there’s one thing that you should be very wary of as a new and young investor, it is leverage. Leverage is the act of using borrowed money to invest in the stock market. Unless you're a stock trading expert who knows exactly what they’re doing, it is always a good idea to stay away from leverage.

When you use borrowed money, the risk goes up tremendously. If your trade doesn’t go according to your expectations, you not only end up losing the borrowed money, but you’re also required to repay it at a hefty interest. And so, always ensure that you only use your own money to trade.  

Many young investors tend to trade with either their entire earnings or a significant portion of it. Such a move can end up badly. When you trade in the stock market, it is a good idea to start off slow by using just a portion of your savings. This way, you can stay well-protected even when the tides are not in your favour.

Also, remember that the dip in the valuations of stocks as a result of the recent sell-off is just temporary. The stocks are bound to bounce back up to their normal valuations. And when they do, you may not always get a chance to invest low and earn returns over the long term. Keep in mind that it is always a good idea to inculcate the habit of long-term wealth creation. 

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