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12 Things You Need to Know Before Investing in Stocks

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Pavan Kumar
Proud organizer. Food nerd. Extreme thinker. Evil alcohol expert. Falls down a lot. Freelance music buff. Explorer.

Investing always comes with risk. You can earn money but lose as well. You don’t need to be an expert to start investing but yes there are many aspects that you must know.

1. Understand the basics first

Take the time to understand the basics of the stock market. Know about the factors that drive securities. Research about individual securities before investing. The following are some financial terms and metrics to clear about:

  • Fundamental analysis – Trading basics rules and compliances, market relationship with the economy, investment cycles.
  • Basic terminology – Market orders, limit orders, stop loss, margin money, Market Cap, definitions such as Price-earnings ratios, Returns on equities, and others. 
  • Technical analysis, Techniques of Stock Selection.

2. Draw a personal financial roadmap

Follow a disciplined investment approach. Take an honest look at your financial situation and draw a financial plan. Take extra care if you are a beginner in the stock market. 

3. Find out comfort zone in taking a risk

Investors cannot afford losses at least in the beginning, especially newbies. You need to decide your risk tolerance before investing your funds. Consider age, financial stability, goals, etc, and only then take risks accordingly. Investments are always good but do not invest your emergency funds in the stock market. Invest what you can afford to lose. Better to invest surplus funds only. 

4. Manage risks 

Risks are inherent in the stock market. Some risks are avoidable and some are unavoidable but you can manage them using various techniques. 

5. Get rid of herd mentality 

If you have given enough time to understand the basics of the stock market, you can easily avoid herd mentality and can choose stocks as per your own knowledge. You can estimate how a stock works and what can be losses and profits of investing in it.

6. Decide your goal of investing 

Don’t start investing blindly. There are different life cycles of different investments. You must have a goal of why you are investing. What is the exact purpose you are investing in? What is the time frame to accomplish your goal? Only then you will be able to find out the right stock for you. 

7. Appropriate mix of investments

It is always suggested not to invest money in one stock. But avoid over-diversification and keep it to a certain limit of stocks. Well-diversified portfolios are preferred but not over diversified. 

8. Pay off high-interest debts as quickly as possible

In case, you have taken credit for investing, the wisest thing you can do is to pay off the debts in full as quickly as possible. There are no such investment strategies that are promising to earn high and that too without risk, so avoid debts on interest or pay off all debts on time. 

9. Know prerequisites for investing

No one can directly go to the company and buy stocks. Brokerage accounts are the prerequisites of investing. You need to contact a brokerage firm that acts as a Depository Participant and open Demat account and trading account to start investing. Choose a proficient broker in this field and take assistance to start investing. A Demat account holds your securities and a trading account facilitates an integrated platform to trade securities. Demat account charges vary from broker to broker and depend on your requirements for stock trading.

10. Have Realistic Expectations 

No doubt, you will want to earn the best from your investments but goals based on unrealistic assumptions cannot be achieved rather it would lead to trouble. It is possible that 100 of your stocks have earned high profits for you but don’t expect it with another 100 of your stocks.

11. Rebalancing the portfolio is important 

Experts suggest considering the investment portfolios every six or twelve months. So that you can find out which stocks are overemphasized and what is the weightage of an investment.  

12.  Avoid High Brand Advertisements 

Do not fall for popularity stunts of a stock. It is recommended to get answers to your questions with an unbiased source before you invest. Take your time and talk to financial advisors or trusted and experienced friends before investing. 

The Summary 

There is no single measure that divides good stocks from bad ones. Investing requires oodles of discipline, great research, and a good understanding of the stock market.

Professionals have their own measures to determine the growth and value of a stock with yielding ratios. Take assistance from financial planners and advisors to invest your funds. 

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