Investing in the share market can prove to be bountiful if done right. You must have heard people telling tales of how they made lakhs of rupees by just investing a small amount of money. At the same time, you must have heard people talking about the time when they lost their lakhs of rupees while trading in the market. Where did they go wrong? What will it take for you to be a successful investor?
There are certain things you must understand before you start investing in the share market to increase your prospects of being a successful investor:
As you are new to the investing game, you should start by investing a small amount of money. Take that sum as a “tuition cost” for you to understand the basics of the market. There is a fair chance that you can lose this money as you are still learning about the market and its conditions. Try to keep this “tuition cost” as low as possible. If you earn a profit on this investment, increase the amount in your next investment. If you incur a loss, analyze the mistakes you made and try again.
Diversification is said to be the primary priority of every successful investor. It follows the old saying that you should never put all of your eggs in one basket. Avoid investing all your money at a single place; instead spread it over a range of securities of multiple companies. The share market is volatile; if the company you have invested in tanks, you will lose all of your money.
Let’s assume that you want to invest Rs 1,00,000 in the market. Following the diversification strategy, you have invested Rs 25,000 in four different companies. If two of your investments go bad, and you lose Rs 50,000; you will still earn a profit of Rs 75,000 on the other two. You have minimized your overall loss and still, have made a profit of Rs 25,000 on the whole transaction. Had you have invested Rs 1,00,000 in one company, you would have ended up losing all your money if the company tanked.
Following the herd
When you are new to the share market, you come across many potential investors giving you free advice for no reason. In their opinion, shares of a big company mean definite profit. This theory is not correct. It is true that a big company is the most probable candidate for earning you big bucks, but investing in a company just because everyone else is investing in that company, will lead you to the path of massive losses. Investing in securities of a company can be perfect for someone but a money killer for you. Nobody knows your financial goals and your situation better than you. So believe it when you hear that you are the most qualified person for yourself to be giving investment advice.
Understanding the market
Investing in something you don’t fully understand will only lead to losses. It is advisable to hire a broker for providing much needed financial guidance. To minimize your “tuition cost” in the beginning, look for a brokerage firm that charges a flat brokerage fee rather than a hefty commission.
The safest way to avoid losses and to be a successful investor is to know what kind of investor you are. It would include understanding about certain things like:
The amount of time you can give to investing.
The amount of money you are willing to spend.
The amount of money you are comfortable losing.
The amount of risk involved in various securities.
The amount of profit you would want to achieve your financial goals.
Your understanding of the market and its ever changing trends.
Once you have understood the basic structure of the market, you can start investing money and try your hand at making money.