Share market has been one of the prime investment avenue that has been talked over for years now. However still there are large number of people who incurs huge losses from investment in share markets. To avoid such losses from investment in share market one should always keep in mind the following basic ideologies before investing in share market.
The following are the golden rules that one should keep in mind before investing in a share market:
The purpose and motive for investment must be sound and clear: It is highly important for a person to be sound and clear as to why he wants to invest in the stock market. It is because investing without purpose will end up providing you with losses. Hence, it is highly important to plan out, why you want to invest in the stock market. The reason for investing in the stock market can be many. Some of them are as follow:
Purpose of Retirement: It is important to plan one’s retirement early. It is because with daily changes that is seen in our financial strategy, it is impossible to predict whether after few decades pension system will be there or not. Hence, planning to invest in stock market with clear objective of secured retirement life is good reason for investment. Further with a clear purpose we will have clear view of how to invest, in which stocks to invest, what are the various benefits that those stocks will provide you, and whether the investment will give you a secured retired future or not.
Purpose of fulfilling financial goal: Like clear purpose of retirement, many people invest in stock market to have monetary gains or fulfill their financial goals. In this case the style of investing and the choice of stock for investing will be completely different than that of, for the purpose of retirement. In trying to achieve financial goal a person investing may take higher risk or may be more aggressive while investing in the stock market to fulfil his financial goal, which may be different for different person.
Hence it is highly important to have a clear purpose for investment. It is, because without a proper pre-defined reason for investment a person will invest in stocks that may not help him or her in future at the time of their need, or they might end up making investment for which they might incur huge loss in future.
Making a clear plan for investment: It is highly important to make a clear plan for investment, it is because, just like purpose of investment without a clear plan, your investment might not end up serving you fruitful results, that you wish to achieve from your investment.
Objective: The motive and objective of your investment is highly important, it defines the expectation you actually wish to get from the investment that you make. Hence you invest accordingly so that the objective is fulfiled by the investment that you make in the stock market.
Creation of a clear strategy to select stocks: To get the fruitful return that you desire from your investment, you need to properly analyse the stock, indices, the market and the other options available before selecting the stock, which you think will actually help you fulfill your objective.
A proper a risk management planning: The stock market is highly complex and unpredictable, hence if one of your investment strategy fails, in that case you must have diversify portfolio to actually handle the over head loss.
Creating a clear entry and exit planning: Well defined rules when to enter either fundamental factors like results, sales growth etc or technical factors like breakout etc along with clear exit strategy for eg outcome of financial results or price below a moving average etc.
It is always beneficiary to follow the trend instead of timing the market: It is always suggestable to go with the flow of the market, it is because predicting the market is almost impossible, hence investing in stock which is providing fruitful result is more sound idea rather than experimenting and ending up in a loss.
An extensive research of stock before investing: A person who wants to invest in a stock market, must do extensive research on the stock before investing, instead of blindly listening to brokers and other experts. It is because a complete research will provide him, with a clear idea about how the market functions, and investing in which stock will be beneficiary for him, and this will also help him to avoid those stocks which might end up providing bad returns or loss.
Planning to invest for long term, using predefined strategy and over looking short term fluctuations for better results: Investing for long term is always suggestible as short term investment can go either way. However, in case of long term investment the result will be positive return on your investment. It is because not every year will result in a positive return on your investment. However, over time the plus will likely overwhelm the minus by a substantial margin. If you want to be a successful investor, you need to understand that it is futile to be affected by short term fluctuations of the stock market.
Starting early with auto investment option is always a better option: It is very difficult to invest in stock market after paying up monthly bills. However to invest for future return and safety it is always advisable that the best way to ensure that there will be money to invest is to make those investments automatically. It can be done by asking the employer to direct a portion of your income to a 401(k) plan or other investment instrument. Since this money comes off the top you will never have a chance to spend it, and since the money invested in a 401(k) is tax deferred you will save money on your taxes as well.
Creation of a proper risk management in case of Intraday like trading plan. However, for long term investment we should diversify our portfolio as per class: Invest only in established companies with a good track record. Stellar performers will have their good years and bad years. But over time, the fluctuations will even out and you would be left with a considerable net plus. Further, diversification is an essential part of stock market investing, and it is important to make sure you hold a variety of stocks, bonds and fixed income investments in your portfolio. Never put all your investment in one vehicle.
It is best to avoid making investment in share market using loans or borrowed money: Investing money from loan is a grave mistake. In case of profit from stock the profit get negatively affected by interest on loan and in case of loss in stock market a person has to bear double loss with payment of loan and loss from stock market.
Maintain a proper relationship between knowing the market and acting according to the market: There is a huge gap between understanding and knowing the market and a huge difference in acting according to the requirement. Hence it is highly important to do the necessary things for betterment of your investment, from the knowledge you earned, it is because not acting according to the requirement of knowing might end you up in the gap between knowing and acting, which might negatively impact your investment.
Since, making money on both end is possible we should always keep both the options open: Stock market has both trend of bear and bull, as a result it is not always necessary that long term trade will always be more fruitful. Hence, when opportunity knock a person should not be biased as short trade can also some time provide good profit margin. Hence when the market condition is favorable and is having a bear trend, a person can do short trade to earn good amount of money. Thus, it is always advisable to be non biased on long term or short term and act according to the need as and when required as per market condition. Namely both the trend as below mentioned.
(a)Buying low and Selling high
(b)Selling High and Buying Low
Staying away from brokers advice, multi bagers and hot tips: Any investor’s decision is easily manipulated by suggestions from acquaintances. Further, advice’s from brokers and other market specialist actually make the investment of a investor bias in nature. This actually result’s in a person investing in a stocks which might no fulfill their objective. Further, if everyone starts investing in a single stock as per the tips of the experts, that stock will ultimately crash because of bubble effect. Hence, it is advisable to do your own research and invest accordingly without any manipulation from the advice’s forwarded by broker, experts or acquaintances.
Maintaining Patience and discipline on the investment: Patience and discipline are the two of the biggest virtue that every investor should have, when investing stock market, most of the failures in the stock markets takes place due to lack of discipline and impatient behavior. One should not rush while taking a decision for investment. Further, they should also maintain proper discipline in managing their portfolio for better results and success from the investments made.
Avoiding forecasters and advisers, as they will only fetch wisdom not money: Depending on forecasters one constantly postpones efforts to self learn the art of making money through hard work and self study. This actually makes a person more dependable on others for making money from stock market. During time of emergency forecasters and advisers seize to provide advice on what to do next, in such scenario’s the investor will be left clueless and will incur huge loss. Hence, being independent and able to take own decision by avoiding forecaster’s in stock market is of high importance, it will help you learn how a stock market function and will actually get you through during times of emergency.
Choosing tax beneficiary investment: It is always advisable to choose tax beneficiary investments it is because, that will save a lot of your earning from draining out as tax. Further, tax beneficiary investments will also provide investors relaxation on income from other sources as well.
Keeping things simple: The stock market itself is a highly complex and unpredictable structure, hence it is always advisable to keep things as simple as possible while investing. The more complex the ideas of a person is while investing the higher will be the risk of the person to incur losses from the investments. Hence keeping things simple and clear is highly important for a investor to gain from his investments.
It is always suggestible to follow the golden rules before investing in share market.