There is no sure-shot formula to investing in the stock markets. However, there are some “golden rules” that one must keep in mind before investing in stock markets-
1. Never follow the Herd Mentality
The most important rule while dealing in the stock market is that one must not follow the herd mentality. Do not just buy a stock because a lot of influencers and experts have recommended buying it, or your friend is buying a particular stock. It is highly important to conduct your own research along with a fundamental and technical analysis before choosing to invest in a particular stock. Warren Buffet said, “Be fearful when others are greedy, and be greedy when others are fearful”. This rule must be followed at all times.
2. Have a Broad Portfolio
Diversification is the key to investing in the stock market. Hence, you must have a broad portfolio that is spread across various asset classes and instruments so that you can earn optimum returns on investments with minimum risks. One should remember that the level of diversification depends on each investor’s risk-taking capacity.
3. Set realistic expectations
If you make unrealistic assumptions and set very high expectations from the stock market, you may be in for a big trouble. While it is understood that expecting great returns from your investments is not a wrong thing but over expecting can lead to failure. For e.g., a lot of stocks have generated more than 50 per cent returns during a bullish trend in the recent years but that does not mean one will invest all your savings in that particular stock/s.
4. Don’t try to Time the Market
While you must have an idea of the right valuation and the price levels of a stock, you must never try to time the market. It must always be remembered that no one has been able to time the market successfully over multiple market cycles. It is impossible to predict when the shares will hit a high or low. Thus, never try to time the market.
5. Follow a Disciplined Approach
Discipline goes a long way in stock market investments. You must have an investment strategy and identify the stocks that you wish to invest in. Once you have decided the target price and a stop-loss, stick to it and do not abandon it any time. Trust your decisions and never unfollow your strategies. Once you have decided how much amount to invest and at what pace, you must follow it .
6. Monitor your Portfolio Constantly
We are living in fast-changing times. Any important event or happening, whether global or domestic, can affect the market. Thus, one must constantly monitor their portfolio and make the changes according to the changing times. If one does not have the time to monitor or research thoroughly, they must take help of a good financial planner who can help them monitor their portfolio rigorously.
7. Invest only in the Business you understand
It is always wise to invest in the business that you understand. You should know about the company, promoters, management, vision, financials and other related aspects. You must not invest in a stock; you must invest in the business behind it. If you do not understand a company, simply do not invest even a single penny in it.
8. Do not let Emotions overpower you
In stock markets, it is very important to tame your emotions. Emotions cloud your judgment and often lead to wrong decisions. There have been various instances when investors have panicked and sold their investments during a bearish trend and have hit rock-bottom valuations. Remember patience is highly important in the stock market and you must not make any decisions based simply on your emotions.
There will always be ups and downs in the stock markets but if you keep these golden rules in mind and trade smartly, you will be able to cross all the hurdles and have a happy investment journey.