When it comes to choosing high-return investments, stock markets have always attracted investors more than any other investment avenues. However, like any other investment option, it is important to keep yourself apprised about how to navigate stock investing, so that you can reap the maximum benefits. If you are just stepping into the world of stock investing, following are a few things to pay heed to.
1. Define your objectives
Prior to investing in stocks, it is crucial to determine your expectations from their performance. For instance, do you want to invest for the long run in high-growth stocks? Or, do you want to earn a steady income in the form of dividends? Either way it is important to establish the objectives behind stock investing. Once this is in place, you can go ahead and shortlist companies that have the potential to help you achieve your financial goals.
2. Do your own research before Investing
As a stock investor, knowledge about the business you are basing your bets on, is your biggest asset. Do not bypass the information gathering step by going with recommendations of peers. Remember, every investor has a different profile and what may have worked for your friend may not necessarily work for you too. Do a thorough research about the sector and the business you are getting into. Some of the things you must deep dive into include history of the organisation, management quality and corporate governance policies, year on year financial performance, competitive advantage and level of innovation, debt levels, defaults on the compliance front if any. While a majority of this information is present in the RHP or Red Herring Prospectus of the company, you should also refer to multiple reports in the media and other sources for a holistic analysis.
3. Remain Patient
The most important virtue of a successful stock investor is patience. If you have done thorough research about the company you have chosen and have belief in its fundamentals and growth potential, then remain invested for the long run. This means you must not relinquish your stocks due to temporary market disturbances. Any business when invested in at least takes 5 years to be able to reap results. So, allow your investments to show results.
4. Know when to sell
While it’s important to buy right and sit tight, a prudent investor also knows when to let go. Its important to pay attention when you see the fundamentals of the company are being compromised. To know whether the fundamentals are changing, look if there is any sustained underperformance quarter-on-quarter, if the utilization of capacity is going down if the non-performing assets (for banks and other financial institutions) going up, or if there is any sudden or abrupt exit of the senior leadership, etc. In such a scenario you should consider an exit.
5 Diversify your Investment Portfolio
Also have a well diversified stock portfolio and never invest a large junk of your capital in purchasing stocks of one business or one sector. Diversification ensures that if one asset performs badly in the market, the loss can be recovered from the investors' other assets. However, make sure you diversify your portfolio keeping your risk-taking capabilities in mind.
To sum up, stock market investing can be a very rewarding experience, provided you enter it with clear expectation, an understanding of your profile sufficient preparedness. Make sure your research is thorough and you are truly aligned with the vision of the business you have chosen. Thereafter, invest and allow your investments sufficient time to give benefits.
(By Harsh Jain, Co-founder and COO, Groww)