10 Things To Know Before Investing In Equities
Revival is the keyword and the Indian economy is opening up like never before. The past year has seen Indian equity markets buzzing with activity and retail investors are joining the race. Here are 10 things every retail investor in India must keep in mind before taking a plunge into the often perplexing equity markets -
1. Learn To Trade – It is very important for retail investors to learn to trade. While engaging the services of a registered broker makes trading quite convenient, but it is essential to learn how the markets function. Both the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange) are currently offering basic and advanced courses in trading. Equip yourself. Market watchdog, SEBI (Securities and Exchange Board of India) has listed registered stock brokers, depository participants, investment advisors etc. on its website. Use the services of a reliable intermediary.
2. Do Your Research – If investing in equities has one cardinal mantra, this is it. Research the company, the sector, the competition, the stock market as a whole, the government policies and prospects with regard to the sector, historic prices, highs and lows of the scrip, and general perception. For those considering investment in mutual funds instead of individual stocks, do look up and study the portfolio of the fund. Look out for the returns track record, the fund managers’ credentials and interests, the company’s reliability, and the costs – both known and hidden.
3. Listen to the Experts, Don’t Fall For Tips – In India, everyone from the vegetable seller to the beautician has a stock tip to share. Wisdom is in the knowing which tip to filter out. Listen to market experts, read up on different views and form your own strategy. Those who trade regularly understand that even experts often hold contradictory views. What you shall gain from such contradictions is an informed opinion. In domestic markets, there is a tendency to invest because friends or family members have done so. The onus of research is always on you.
4. Know Your Risk Appetite – There are no refunds in the stock market. You may be well advised to know your risk appetite before investing. A cautious approach is always best but on the other hand, panicking never helps. It makes sense to buy shares on a fall if the company’s fundamentals are strong. It always helps to build up a contingency fund as well. Most importantly, do not dip into your retirement savings and other such essential funds on the promise of quick returns.
5. Constant Vigilance – Stay connected to the markets. Watch business news, read the business sections of news portals. In these days of mobile devices, a number of different apps allow you to track your investments, provide news flashes with respect to your portfolio. These apps also help you to monitor sectoral changes and allow you to stay in touch with other investors of a particular stock/mutual fund. Get an online trading account. This allows you to function independently of your broker in case the need arises.
6. Long-Term, Short-Term – Decide if you want to trade short-term, long-term, or even intraday. Each of these options comes with a risk level. Mutual funds and SIPs may have a fixed term. If share trading is not your primary occupation, only invest funds that you may not need for a year. This gives investments time to mature, or to recover if things go awry.
7. Divorce Occult From Investment Ideas – Muhurat trading is all very well, but investments are best divorced from occult and fortunetelling. “Well, if you are concerned over this market, and you decide to go to an astrologer to get advice, this I will guarantee: you will lose money”, says Phil Plait in his blog post about Astrology and the stock markets in the Discover Magazine. In India, with people seeking out astrologers, numerologists, and fortunetellers to help in every sphere of life, risks are multiplied manifold with retail investors taking stock advice from those who know next to nothing about equity or investments.
8. Diversify Your Risks; Invest Wisely – Diversification of portfolio is the market equivalent of ‘Don’t put all your eggs in one basket’. According to Fidelity Investments “you may not want one stock to make up more than 5% of your stock portfolio”. Build up a robust portfolio with investments in various stocks in a sector, and in various sectors. Apart from this, your investments must always be a healthy mix of equity, commodity, bank FDs, insurance, real estate, and government bonds and other low risk investments. Indian investors tend to over invest in gold and equity – this must be avoided.
9. Learn From Your Mistakes – Investment mistakes are inevitable. Do not let them sink you. The greatest risk, as the saying goes, is not investing. Calculated risks are an essential part of trading and sometimes losses do occur. What is important is cutting your losses in time before it’s too late and getting back to the research table. Learn what caused your predictions to go wrong, emerge stronger.
10. Pay Your Taxes – Stock market earnings are not free of taxes. There are a number of costs involved when it comes to dabbling in equity. Your DP (depository participant) and broker will charge you a certain fee. Negotiate the best deal with them. In India, the profits derived from sale of shares are treated as long-term if they have been held for at least 12 months on the date of sale and Capital Gains Tax may be applicable. There are certain exemptions applicable. Understand these provisions and secure your finances.
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