Investing in Stocks for the First Time? Things you need to know before starting your Investment

Investing in stocks can give you a significantly high rate of returns over time and can help double your wealth. Indians, financially savvy as they are, have caught up with this fact. According to recent reports, the number of brokerage accounts in India have grown by a whopping 40%! There are, now, an estimated 83 lakh brokerage accounts in India.

SEBI reports have noted that Indians are exhibiting different saving strategies today than the ones that were in vogue in the past. In the past, people used to invest in assets such as gold and real estate - today, people start online demat and trading accounts to invest in alternative assets such as stocks.

However, many potential investors are still apprehensive about trading on the stock market, owing to volatility. But by implementing a few basic practices, volatility becomes a negligible factor. A new trader, then, should keep the following points in mind before making his first investment.

1. Start Slow

The best way to start investing is to invest your surplus income that you can afford to lose. It takes time and effort to develop the financial acumen, proper mindset, and patience required to make profits in financial markets. A big upfront investment might lead to big upfront losses, and that may put people off the stock market. A small investment, on the other hand, is a cheap and easy way to develop the skills required to turn your future investments into large profits.

2. Pick a Strategy

There are distinct investment strategies in the financial markets. Below are the two most common ones:

Intraday trading:

Intraday traders clear all their positions before the end of day. Instead of taking into account the underlying value of a stock (or a commodity), they aim to turn short-term price fluctuations into profits. The daily news-cycle and financial hearsay can lead to market swings that the intraday traders look to capitalize upon.

Value-investing:

The value-investors seek undervalued companies and then hold their positions for a long period of time. Proponents of value-investing include Warren Buffet, one of the richest men in the world.

Traders are free to pick the investment approach that suits their personal disposition and financial goals.

3. Strike a balance between diversification and focus

Putting all your eggs in one basket can lead to unnecessary losses - therefore financial analysts advise traders to maintain a diverse portfolio. With a diversified set of investments, unexpected sector-specific developments will not impact all of your positions. However, spreading your investments too thin can lead to a lack of discipline and therefore low gains. This is especially true for value-investors - part of the game-plan for those who are pursuing value investments is to accept short-term losses as mistaken market evaluations that will be corrected over time.

Therefore, striking a balance between diversifying your portfolio and maintaining focus is important.

4. Track the variables

Stocks are affected by variables like the following:

  • A company’s quarterly reports. If the actual profits do not match the projected profits, the market will adjust the company’s stock value accordingly.
  • Global political swings. Political events like Brexit impact stock markets and currency markets around the world.
  • Pandemics. Shares of Chinese firms dropped to a 4-year low due to the spread of the coronavirus.

To invest in financial products, it's important for traders to stay abreast of these variables.

5. 3 ratios to understand before investing

Getting better at reading numbers and graphs leads to better investments, which lead to better profits. Below are three very important ratios that all traders must understand before making their first investment:

Debt to Equity Ratio:

A high debt to equity ratio suggests that the company may be a riskier investment bet. A low debt to equity ratio, on the other hand, means the company is financing its growth through shareholder equities and not debt liabilities. This shows that the larger market has confidence in the company’s future growth prospects.

Return on Equity(ROE):

This ratio measures a company’s ability to turn its assets into profits for the shareholders. Companies that are better at turning the shareholder investments into profits - and hence better dividends for the shareholders - are a good financial bet.

Price to Earnings(P/E):

This ratio tells you how much you need to invest in a company to receive one dollar or rupee of that company’s earnings. This ratio can help new traders separate the wheat from the chaff and know if investing in a particular stock is a good idea in the light of that stock’s price and historic return value.

Conclusion

With the lower tax rates announced in the 2020 budget, the Indian government is aiming to leave more disposable income in the hands of the taxpaying Indians. Investing in the stock market is an intelligent use of this disposable income because of the healthy returns over time and the variety of options.

To take the first leap towards trading on the stock market, you would first need a demat and trading account. Opening a demat account and trading account with IIFL takes less than 10 minutes. A trading account with IIFL lets you trade from the comfort of your home or office. The trading account adapts to your investment preferences and financial goals - you can buy commodities, trade in equities, or buy and sell currencies.

IIFL provides the competitive edge to those with registered trading accounts on its platform in the form of latest market data and in-depth research. Such market analyses and a responsive support system allows IIFL traders to substantially grow their wealth over time.

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