Do’s and Don’ts of Stock Market Investing for Beginners

5paisa Research Team Date: 05 Sep, 2022 05:47 PM IST


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As a beginner in the share market, you may feel intimidated by the fluctuations in stock values, constant changes in trends, and the possibility of high returns or losses. However, your investment experience can be less turbulent if you follow certain dos and don’ts. This article elaborates on smart ways to invest money and how to make money in stocks.

Investing money for beginners - Do’s

Here are some tips on how to invest money:

1.    Perform thorough research
You need to understand the market trends to be a successful stock investor. Before investing, learn about the company’s stock patterns and various investment options within the stock market. You can also enrol in a few courses online to get a head start on the best way to invest money. 

2.    Start small initially
Success as an investor requires a step-by-step approach. If you ask experienced investors how to start investing, they recommend starting small. The initial investments in small amounts help you get acquainted with the market without incurring huge losses. 

3.    Invest your surplus funds
Investing in the stock market is always risky. Your investments can incur losses or rewards you with huge profits. However, there is no certainty. Therefore, you should only invest surplus funds that will not adversely affect your lifestyle.

4.    Decide your investment goal
If you have a specific financial goal/plan, you can better plan your investment path in the stock market (and monitor their progress). Goals will motivate you to choose suitable securities and help you stay on track.

5.    Diversify 
The adage “don’t put all your eggs in one basket” also applies to investing in the securities market. Investing in different financial instruments, industries, and other categories reduces risk through diversification. Your portfolio is low risk if you invest in at least three to four sectors.

6.    Divide your portfolio 
Creating a portfolio requires separating assets into core and satellite segments. The core portfolio provides stability and helps you achieve long-term goals such as sponsoring a child's education or retirement. Satellite portfolios are more trading portfolios that look for short- to medium-term opportunities.

7.    Build a portfolio
A winning stock portfolio consists of 8–12 stocks with reliable returns. You will unlikely find all the best stocks to invest in, but you can add and remove shares yearly to build a solid portfolio.

8.    Invest for the long term
Stock market fortunes are almost always the result of long-term investments as they tend to be less volatile than short-term investments. Usually, it takes 1–2 years for stocks to deliver good returns to investors. Therefore, to succeed in your investment endeavours, cultivate long-term thinking habits.

9.    Stay alert and updated—buy and sell as per market fluctuations
Before investing, research and identify if the stock price will rise. If a stock has reached its upper price limit and will likely fall, you may want to sell it. It is also vital to pay attention to news that could affect the value of your stocks.

10.    Be consistent
Obtaining profits from stocks requires consistent and periodic increases in investment amounts. It enhances your financial discipline and allows you to take advantage of rupee-cost averaging. In other words, the cost of investing decreases over time.

Investing money for beginners - Don’ts

Here are some investing mistakes to avoid:

1.    Treating investing as gambling
Comparing investing to gambling is one of the biggest stock market mistakes you can make. If a person invests for thrill or social validation purposes, rather than in a logical approach, they are likely trading in a gambling style. Refrain from buying any random stock with the hope of giving you 2x returns in a month.

2.    Indulge in speculative trading
A speculative trade is when you buy or sell a stock because you have heard its value will rise. If your prediction comes true, you make money; if you don't, you lose money. This method is risky, considering your surplus savings are on the line. 

3.    Trust unverified tips
The majority of investors fall into the trap of putting their hard-earned money at risk based on the tips from others. Hence, no matter how appealing free tips or recommendations sound, never blindly follow them. Before investing in any stocks, do your research.

4.    Have unrealistic expectations
Novice investors expect to make huge profits from a single investment within a few months. However, the stock market disregards expectations. Even though such a return is rarely possible, annual returns of over 12% are considered good enough.

5.    Invest too much in the initial stage
As a beginner, investing everything you have without research is a recipe for disaster. Starting with small investments and adding them over time is much better than investing all your savings and losing everything. 

6.    Take uncalculated risks
Risk is at the core of every investment. However, in the stock market, the risk is higher and making uncalculated investments can lead to significant losses. Understanding this attribute will enable you to identify potential red flags before investing and direct you toward the proper research avenues.

7.    Make emotional decisions
Your stock market investments to make money should not lean on emotion. Investing in a company that is not profitable or does not have a bright future may not be the best idea, irrespective of how it “looks” and other secondary attributes.

8.    Underestimate the qualitative value of a stock
The definition of quality stocks includes several factors, such as earnings quality, stock turnover, and more. Choose companies with high standards of disclosure and transparency on a qualitative level.

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Q1. What are core and satellite holdings?
Ans. The core portfolio provides stability and meets significant long-term goals. A satellite holding is a tactical allocation in which you take higher, short-term risks to maximise returns.

Q2. How to build a portfolio?
Ans. You can follow these steps to build a portfolio:
●    Identify your financial objectives: determine what the portfolio is meant to achieve
●    Ensure you don't invest more than you can afford
●    Diversify: don't put all your eggs in one basket

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