5 Lessons to learn before investing in stock market

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One can never learn enough in stock market, but one can learn from the experiences of others in stock market.

We hear a lot from financial experts that in the Stock Market, everyday is a new learning experience for them.

For a beginner it is always advisable to take note of the experiences of such stock market experts in order to learn stock trading & investing.

In this blog, stemming from the world of investing and trading, we will be discussing 5 lessons to be learned before investing in Stock Market

Keep it Simple

Many people are of the opinion that picking stocks is a complex undertaking. In reality, one must keep the process of stock selection simple. Investors should have an approach to stock selection which is unique to that person’s strengths. For instance, a person could have a passion or keen interest in cars. Such a person would have a strength in the automobile sector as he would know what each company is upto.

World events like India- China border disputes, Locust attacks and Covid all have major effects on the stock markets, but can also be seen as opportunities. Knowledge about Locusts could have enabled a trader to identify stocks from the fertilizer industry. The point is to keep the rationale behind the investment logical yet simple. According to ace investor Peter Lynch, one must have an edge on something. A doctor would know about the latest medical equipment and its performance much better than others. That is an edge a doctor has over others.

Know what you own:

People are very careful while buying a new Air Conditioner or a Refrigerator. They analyse the list of features a product offers with great detail.

But when it comes to stocks, they invest lakhs simply based on a tip received from a distant uncle. This is not a prudent approach to investing. This is called speculation and is akin to gambling.

Behind every stock is a company. When you own a stock, you own a piece of the company. So if the company does well, the stock price rises and vice-versa. Therefore, one must only invest in a company that they understand. It is the investor’s prerogative to find out what is going on inside a company. This process of knowing about the company is called research analysis.

Don’t Just Invest In Stocks- Diversify

Historically, the stock market returns have been one of the most profitable than any other asset class. But several investors who invested in stocks as early as 2016, have their portfolio returns in the negative. Though one can point towards COVID-19, such socio-political issues have always proved to be a kick in the teeth for the stock markets. During times like these, portfolio diversification is an investor’s best friend.

Diversification is essentially to invest your capital in various asset classes. This could be in gold, real estate and bonds etc. The fundamental reason for diversifying is that each asset class reacts differently to a particular event.

Let’s take COVID-19 for instance. With the stock markets reeling from the pressures of a global lockdown, Gold returns have been making all-time highs. Even a Fixed Deposit is giving higher returns than most stocks.

Stop trying to time the Markets

A perplexity amongst fellow investors is about timing their entry or exit from the markets. Most financial experts suggest that an effort to catch the top or bottom of a stock price is a farcical undertaking.

Many investors wait for an opportunity of a major pullback or fall in the stocks. In reality, such a pullback never happens. Instead strong demand pushes the markets higher and higher. The investor eventually falls a victim to FOMO (fear of missing out) and invests at very high prices. Being patient is an important virtue but falling victim to one’s own emotions leads to eventual losses.

A good way to tackle such situations is to spread your investment over a larger time frame. This gives us an entry point in various timelines, helping us overcome not just our emotions, but also price volatility.

Learn Everyday

Knowledge is power. The stock markets are dynamic in nature. It changes with every passing day. Hence it is imperative for a smart investor to not remain obstinate. To stay on top of your game, one must constantly adapt to the changes.

Buying stocks solely based on advice from news channels, stock reports and advisories are most certainly going to teach you some hard lessons. If there is one thing in common between successful investors like Warren Buffet, Vijay Kedia, John Templeton or Benjamin Graham it is the thousands of hours of effortful study to master the necessary skills of finding worthwhile investments.

Buffett read every investing book in his local library, many of them multiple times. More importantly it is how you interpret that knowledge and not just simply consume information.

Author: Vineet Patawari, Co-Founder & CEO, StockEdge

Disclaimer: The views expressed here are Mr. Vineet Patawari’s own and do not reflect the views of Business Upturn. We request all readers to do your own research before any investment.

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