Things To Know Before Entering The Stock Market
1. Research Is The Key
Stock market research includes studying the target company's competitors, financials, leadership team, net income, revenue, Earnings Per Share (EPS), Return On Equity (ROE), sources of income, competitive advantage and Price-earnings ratio (P/E).
2. Understand The Risks
You might lose some amount in the volatile stock market. Thus, invest accordingly. Similarly, there are various types of risks, such as market risks, macro risks, equity risks, and systematic and unsystematic risks. Thus, you must invest in a related security according to the risk in stock market. For instance, purchasing an index fund comes with systematic risks.
3. Diversify Your Portfolio
Different assets perform differently over time, and investing in various assets is called diversifying your portfolio. Thus, your portfolio will contain a mixture of bonds, stocks, real estate (REITs), precious metals, and more.
4. No Short-Term Trading In The Beginning
Short-term investment brings unrealistic expectations at the beginning, that cannot be fulfilled quickly, and taxes and other penalties. But, you may avoid the stock-specific risks.
5. Confirm Your Investment Style
Determine your investment style according to your relationship with money, as it will affect your risk tolerance. For that, assess your financial goals and determine whether you want to be an active or passive investor.
6. Do Not Put Everything In
According to the thumb rule of investment in stock market, do not put money into stocks that you cannot imagine losing because the money market comes with risks and volatility. You might either gain or lose everything.
7. Do Not Borrow Money
However, it comes with the advantage of increasing your Return On Investment (ROI) and the disadvantage of losing more money. Thus, better use it after gaining some experience in the stock market world, but it is a big no in the beginning.
Stock Market Basics
1. Index Funds
Index funds are the best for beginners in the money market. They are diversified, cost-effective, and have lower expense ratios. You do not need to be an expert in the stock market or conduct more research if you are investing in index funds.
2. Low-Volatility Stocks
Low-volatility stocks are those whose prices remain stable or move slowly. They tend to underperform in the market but provide better results over the long run. So, they reflect superior investments when the risk is considered.
3. Penny Stocks
Penny stocks are only useful due to their minimal capital requirements. They have a small market capitalisation and low liquidity. Thus, they come with fraud, sudden declines, price manipulation, and other losses.
4. Blue-Chip Stocks
Blue-chip stocks can be used by beginners and institutional investors due to their low volatility and recognised status. Thus, the latter types of investors can use these stocks for portfolio stability.