It can be tempting for novice investors to get a piece of the stock market action. The stories of other people’s gain can make you wonder why you are keeping your cash away in a safe.
But, before investing, the first question you need to ask yourself is how would you feel if you initially lost money? Do you know investing in equities can be risky? It happens especially when indices of the National Stock Exchange (NSE) are close to their all-time high levels.
Experts advise first-time investors to enter the equity market via mutual funds. It may not be a rational decision to jump into the equity market without knowledge. Initially you should invest the bulk of your equity corpus in mutual funds.
The stock market is not a route to quick riches. If you ignore this fact, you will soon come to grief. You may be lucky on your first investment. But then, you may buy something that will keep sinking.
Try to learn the tricks of the trade from an unbiased source. Many brokerage houses today run short-term learning programmes on equity investing. These will let you know what is share trading and why Sensex and Nifty go up and down.
The large-cap stocks are better options for starters. These stocks are less volatile than mid and small-cap stocks. The information available for large caps minimizes the probability of unpleasant surprises.
If a stock’s key factors continue to be sound but its price has fallen, you should buy more. In the reverse case, you should sell.
You should stick to simple businesses whose functioning can be understood easily. Experts advise to go for those companies whose products will not become obsolete in future.
You can buy and hold the shares of such companies that enjoy sustainable competitive advantages. The analysis of the facts of the last three-four years will help you in understanding the growth pattern of a company.
Many companies overstretch themselves when the economy is expanding. Don’t invest in such companies. You must analyze the debt and equity ratio and the interest coverage ratio to understand the degree of leverage a company can enjoy.
A new investor should always keep in mind not to trade in the market when the Sensex is at a high and the valuations have already been stretched. First-time investors should also avoid initial public offers (IPOs).
If you start understanding the fundamentals of trading in the National Stock Exchange, this can be a rewarding engagement as well. Make sure, you are following the dos and don’ts mentioned in this article.