Investing in stock market? Know these 7 things first
nvesting in stock market can be tricky and frustrating at times for those who expect immediate results. I won’t say it is an art or science, but simply the depiction of human tendency. I agree that one should have a basic knowledge of how the stock market works and some basic maths.
If you are reading this it means you already have the basic knowledge of the market and want to make sure that at least you start on the right path. Otherwise, if you want to start from the scratch here is a relevant blog-post:
Here are the 7 things you need to know before investing in stock market:
Choose your broker for investing in stock market:
One of the most important thing (apart from money) to invest in stock market is to open a demat account. The demat account can be opened through stock broker/brokerage house, now a days even banks also offer the facility of demat account.
The brokerage charges differ from broker to broker hence it is necessary to compare the the brokers, Earlier the brokerage rates were high due to which individual retail investors. Now, we have discount brokers who offer possibly the lowest brokerage rates in the market.
In India, we have multiple stock brokers available. Sharekhan, Zerodha, Angel Broking are some of the prominent ones.
I have my demat account with Zerodha. The experience so far has been good and the user interface is customer friendly. They are constantly making upgrades to their platform to provide better services.
Choosing appropriate broker is necessary if you are starting with small initial investment. Because, it is unlikely that you will hit the jackpot in the early days. If majority of the returns that you generate gets deducted as brokerage charges then you will be left with little portion. This is one fact which lowers the morale of early investors.
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Have (at least one) strategy in mind:
When one starts investing their money they start exploring new strategies to get rich fast. Some of these ‘grow rich quickly’ strategies are phony because most of the time they DON’T WORK. But, if you are genuinely reading about some of the tested strategies then my suggestion would be to note down only 3 top strategies which you can follow. Out of those 3, I would further suggest that you proceed with only 1 strategy for the time being.
Having 1 strategy to begin with simplifies things. If you keep multiple strategies then you get confused. This confusion is created because you tend to choose stocks based on multiple strategies and trust me the parameters will contradict your choices. So, have at least one but clear strategy to begin with so that you can pick a stock.
As the time progresses you can continue your research and add more strategies to your arsenal. With time, you will have better understanding through the experience. This experience will give you confidence to implement new strategies.
Better returns require patience:
The stock market tests your patience to the core. I have seen cases where you keep tracking a stock for months with a target price in mind and it hardly moves to that range. At that point you have 2 possible options, stay with the stock or sell it and move on. Majority of the cases who choose to sell the stocks experience that the day they sold the stock, it started moving upwards and even surpasses your target price.
If you choose to invest in stock market, you need to have discipline and patience. As I said, it more than are or science. Its the test of human tendencies and how long you can hold your ground.
The markets can get swayed by various factors. Even a small rumor can trigger a domino effect resulting in market surges or crashes. Though, such scenarios last for short duration but the impact that they have is just because of human tendency to avoid future adversities.
Be ready for the stock market turmoils:
Turmoils in the financial markets have a detailed history. In the past these were caused by wars, pandemics, frauds, unorganized structure, and mainly because lack of knowledge & awareness.
When you invest in stocks you need the ability to withstand all the turmoils in the market. In the recent times, we have seen the 2008–09 fiasco which triggered a global recession and the stock market crash due to COVID-19 pandemic.
During the above mentioned situations the impact on global financial markets was humongous although they occurred over a decade apart. The incidents created a ripple effect which affected the stock markets across the globe.
During those period the stock markets were in havoc. Everyone panicked. Most of the investors booked their losses and exited. Some of them would have swore not to put their money in stocks ever again. Whereas some people would have looked at it as a golden opportunity to buy more stocks because the stocks were cheaper.
During that period my portfolio was down by 18%-20%. Even then I added more stocks to my portfolio during the initial lockdown and global market collapse. What was the outcome? the stocks rallied up significantly raising the overall performance of the portfolio. Currently, the portfolio is up by 35%-38%.
This benefit kicks in only for those who could withstand the situation and take rational decision. Therefore, if you want to invest in stock market, be ready to handle the turmoil.
Its just a STOCK! Keep emotions aside:
rom the above points it can be understood that the human emotions play a vital role in the stock market. Therefore, keeping your emotions in check becomes imperative when dealing in stocks. You need to be as practical as possible, stocks need to be treated as commodity.
Investors like Warren Buffet say that one should not think about selling a stock after they decide to buy it. Stay with it forever but in reality we need to decide what is the lowest point of our stock or till what point you can bear the losses. When that point hits, keep the emotions aside, sell the stock, square off the position and move ahead with new stocks. On the other hand if you selected the stock with a target price in mind and the stock has already passed that point then keep the profit rather than falling prey to greed.
It is easier said than done. But, over the period of time one gets the clear idea and understands this fact through the hard way. Therefore, investing should be taken as a business and all the decisions need to be made from a business point of view.
Know about taxation related to stock market investments:
Taxation is an aspect which many people tend to ignore just because they are not aware or they find it complicated to understand. But in reality, understanding taxes is easy as long as you are looking for specific information.
Taxation policy differ from country to country as well as state to state. Taxation on stock market investment also differ. There are direct and indirect taxes levied on the income generated from buying and selling of stocks.
Direct taxes include taxes levied on individual’s income earned within certain period (generally, financial year). You need to get an idea of what are the income tax policies for income generated from stock market.
Indirect taxes are the ones levied on goods and services. In India, taxes like GST (Goods and Services Tax), Service Transaction Tax (STT), are imposed when dealing in stock market.
The reason why it is important to understand tax implication because it gets deducted from your proceeds. Indirect taxes are immediately deducted from the proceeds at the time of transactions are executed. Direct taxes need to be paid within stipulated period as per the taxation policy.
Being unaware of the taxation can get you in trouble because if you think the information of your transaction is not available with the finance department then you are wrong. While creating demat account you are required to submit government ID proofs and document like PAN (Permanent Account Number) used for financial transaction purpose. If you fail to report the income from your end then get ready to receive notice from the finance department.
So stay up to date with the taxation policies related to investment in stock market and income generated from it. This will help you stay safe from a lot of trouble. And please File Your Taxes on time.
Keep your money safe:
I go by 2 rules while investing in stock market, no. 1 ‘Go with the Guts’ and 2 ‘Don’t loose your money’. The money that one invests is hard earned, loosing it will be devastating. When we do business we have to take risks and also bear losses but those should be calculated and not spontaneous in nature.
The biggest mistake one can make is take the risks out of his/her risk capacity and unfortunately loose all the initial capital. I have seen that happening with a lot of people. The lesson to learn here is keep your money safe. Analyse the situation, calculate the risks and finalize then decide whether you can afford it or not.
There are methods to analyse the risk to reward ratio various parameters and tools to keep everything in check. You can always use them for managing your portfolio and avoiding loosing your money.
Lastly, I would like to sum up by saying don’t just make a head first free fall into the stock market. Understand the basics, learn what is essential, get yourself acquainted with the tools and technology to do your research, and then enter the market with confidence. Stock market is a great place if you want to make money or increase your wealth and the point here is not to scare you off from investing. But, encourage to invest your time in gathering information to make calculated decisions.
Once you get the hang of basics you can easily start investing in stock market and with experience you can become a good investor. It will not happen overnight that is for sure. You have to give it time, take some hits, make some bad decision and also get some heavy profits too.
