There can be numerous approaches towards the stock market. When an individual is new to stock investing, they focus on making quick money. But it is not the right approach, especially for beginners. It increases the level of risk involved in the stock market. Stock investing should be based on strategies. Most successful investors emphasize stock market basics. Experts say there cannot be a smarter way to allocate capital to stock market investments than long-term investing.
Here is the step-by-step guide to investing in the stock market to ensure to invest correctly.
- Determine your Investing Approach
There are different ways to invest in the stock market. You need to decide how you want to invest in the stock market – actively or passively. You need to recognise your limitations, like time to do research and your risk appetite.
A beginner with adequate knowledge of the stock market can invest in equities directly. If they do not understand how stock prices move with market fluctuations, they can prefer to invest passively through mutual funds. Asset management companies (AMCs) will ask you about your investing goals and offer an investment portfolio to achieve those aims. On the other hand, If you are interested in direct equities or upcoming IPOs, you need to research them very well and pick individual stocks only if you believe in the company’s potential for long-term growth.
- Open Demat and Trading Account
Stock market deals in dematerialised securities only. Therefore, you need to open a demat account and trading account. You should decide your investing approach and amount to be invested beforehand to open the right demat and trading account with the right stockbroker. An individual who intends to invest less than Rs.2 lakhs in the stock market can consider a basic service demat account (BSDA). If the investment amount exceeds this limit, you need a regular demat account. Individuals focusing on long-term investing can consider a discount broker to save on demat account charges.
- Decide How Much You Will Invest
The stock market is not only for wealthy investors and there is no specific formula to determine the amount of money needed to start investing in the stock market. You can start with one share only. The investment amount may depend on your monthly surplus funds and your risk appetite. The thumb rule is that you invest only the amount you can afford to lose. If it is about intraday trading, it is advisable to keep your savings separate from the trading budget.
Some beginners may want to invest borrowed funds. Borrowing funds from the broker and investing in the market can be a common practice for experienced traders. Beginners should avoid taking leveraged positions as it involves high risk. If your leveraged trade does not generate profit, you will end up losing all your funds and will also incur borrowing costs.
- Asset Allocation
Your investable money is allocated to different investments. Following the asset allocation strategy, your age, risk tolerance, and objectives are major considerations. Talking about your age, individuals getting the older desire to dedicate a lower portion of their portfolio to stocks. Low-risk investments, like bonds, become a more desirable asset to keep their money. It is the case if investors are reliant on your investment income. On the other hand, a 30-year-old investor looking to accumulate retirement funds may have dedicated 70% of their portfolio to equities, and the rest would be in bond funds.
Thus, stock market investing is a matter of figuring out the right investment approach per your financial goals, risk profile, and investment horizon. If done well, it can be the most effective way to build considerable wealth over time. Once you understand the investments and impacts of market moves on different investments you can make prudent decisions, leading to significant profits. You should have a diversified portfolio that reduces the outsized impact of an investment on your portfolio.