5mins read
Published on: Jun 28, 2024
#Financial Markets
A stock market is a large network of trading activities in which you can buy or sell the stocks of companies in sectors such as energy, fintech, banking, textiles, and more.
Do you know that investing in the stock market is one of the most trusted strategies for wealth management? New investors are, however, quite apprehensive about how the stock market works and are nervous about entering the market for investing. First, what’s a stock market?
A stock market is a large network of trading activities in which you can buy or sell the stocks of companies in sectors such as energy, fintech, banking, textiles, etc. Today, we will list a few basics of the stock market for new investors so they can learn more about the market fundamentals and begin investing.
If you are planning to enter the stock market, the first step is not to choose the best-performing stocks. Instead, you should first identify your financial goals and know why you are going to invest in the stock market. A few common financial goals we come across are:
• Buying a home within a span of 10 years
• Financing children’s college education when they grow up
• Saving for post-retirement life
• A family holiday towards the end of the year
A rather common goal behind investments is becoming wealthy. And, why not?
Once you have decided on your financial goals, you can create a strategic plan for investing in the stock markets. A goal of a family holiday later this year will need an investment plan of only a few months. On the other hand, a goal of children’s education or a home or a secure retirement requires an investment plan of 10-20 years. In this manner, you can create a short-term or a long-term investment plan based on your financial goals.
Image: Demonstration of the movement of the stock market
You journey in the stock market begins with choosing the right stocks to invest. The obvious parameter to check is a stock’s price movement in the past. However, it’s not enough as past performance of a stock is no guarantee of its performance in the future. We recommend that you analyse the following parameters of a stock:
• Earnings per share (EPS)
• Price-earnings ratio (P/E ratio)
• Quarterly reports of the company
• Balance sheet and income statement of the company
You can assess a stock's financial health only after properly analyzing the above-mentioned details about it. Often, a stock is everything that a lot of investors are interested in. Choose the stocks that you think will give you returns that align with your financial goals.
If you are investing in a few selected stocks, you either must be a pro or a genius to score high and realise gains. It is nearly impossible to predict the price movement of stocks, especially if you are a novice.
A lot of stocks frequently tumble on the charts, and new investors end up losing their investments. We recommend that new investors should invest in index funds, such as mutual funds, instead of individual stocks. A mutual fund is a pool of multiple stocks spread across industries. This way, you can diversify your investment with a fund with the help of a wealth manager.
Since a wealth manager pools capital from a large number of investors, he invests in a large number of stocks and other financial instruments. You can choose one of the systematic investment plans (SIPs) or systematic withdrawal plans (SWPs) to invest in funds on a monthly basis.
However, if we compare the best-case scenarios of stocks and funds, stocks are a better choice than funds because the latter offer lesser returns at higher fees. But novice investors not looking for early heartbreak in the markets should consider funds. Funds are a low-risk financial instrument because of their diversified pool of stocks.
Since we have recommended index funds for novices, we also recommend that new investors should keep in mind the diversification of their investment portfolio. If you invest only in fintech stocks, they will collapse in the case of a collapse of the fintech sector during a certain quarter. The same applies to any sector, whether it's energy, textile, or healthcare.
It is never good to keep all your eggs in one basket. Therefore, we recommend that you maintain a diversified investment portfolio. Though this strategy doesn’t offer as many potential returns as individual stocks do, diversification protects you against high risks in the market.
The stock market experiences turbulent times a few times every quarter. The key to a wise investment strategy is being patient when the value of your investment is dwindling. Otherwise, you end up abandoning the market with losses.
An investor needs to take care of short-term volatility in the hopes of long-term financial goals. Remember that any investment involves risks, and every investor is prone to risks.
New investors should realise that they should keep their long-term financial goals in mind and avoid short-term benefits. Daily trends in the stock markets shouldn’t influence your trading activities as these short-term volatile trends impede your long-term financial goals.
Stop looking at your investment portfolio every now and then. Be patient and go long-term, not short-term. This strategy helps you stay in the game for long.
We recommend that you deploy a strategy in which you keep investing over time. Don’t be done with one large investment and forget it. Instead, you should keep adding capital to your investment.
This means that you should save a certain amount of funds for investment each month. If you fix a certain amount for investment, you can choose to automate SIPs or SWPs on a monthly or quarterly basis. Only then can you invest over time. It's a healthy strategy and helps an investor create wealth over time.
A new investor should begin investing in the stock market at the earliest possible. In a stock market, a buyer is looking for a stock whose price is expected to rise, and a seller is offering a stock whose price is not expected to rise.
A beginner should start small and slowly build over time to achieve their long-term financial goals. Investing is a journey. With time, patience and discipline, you can build a solid foundation for a secure financial future.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
Join the community to receive exclusive market analysis and updates!
Ignite your financial journey with BitDelta's diverse asset classes.
