There is one dialogue from webseries Scam 1992: The Harshad Mehta Story which stands out for me – “Stock market aisa kuan hai jo pure desh ke paise ki pyas bhujha sakta hai” And this is completely true. Stock Market has the lure of giving unlimited profits which entices everyone from newbies to seasoned traders to try their luck. So if you are planning to invest in stock market and are looking for share market tips for beginners, then look no further. This article lists 10 Things to know before investing in stocks in India.
There Is Always A Risk Of Loosing Money
No matter who you are or how expert you are in stock trading, never forget one fundamental – Profit and Loss are part of stock market investing.
Be mentally and financially prepared that there is always a chance that you can loose your money no matter how good the stock is or how well you have analyzed the market. Best example of this is the unforseen Covid pandemic which caused global markets to crash and investors to loose money.
You Can Reduce Your Losses
Many people consider stock trading to be a gamble. In my opinion, it is a combination of science and art – the more you read, learn and practice, the better you will become in reducing risks of loss and improving chances of profit.
So before investing in any stock, make it a point to study in depth about it. Do its SWOT analysis (Strength – Weakness – Opportunities – Threats), find out how fundamentally strong the stock is, understand the business of company, their competitors, market size, market share, entry barriers for new players, factors which can influence the company, sourcing-distribution model, dependent ecosystem players/parties etc. Also remember to go through books of the company and do technical analysis to understand how company is doing financially – how much debts do they have, are they profitable/on path to profits, profit margins, asset and liability situation, P/E, P/B, dividend, EPS, ROE etc.
You also need to understand how various external factors – macro and micro economics, inflation, oil prices, political affairs internally and in the world etc can impact your stock.
Having all these information will help you know much better about the company and whether it is a good buy or not. This will increase chances of buying the right companies capable of making profits thereby reducing the chances of loosing money.
Good Stocks Can Also Give You Losses
Just studying and identifying good stock is not enough. You should also know the right price range to buy and sell the stock. If you purchase the good stock at a very high price, chances are that you will not make much profits. Similarly if you sell good stock at wrong price, chances are that you have either made less profit or are in losses.
So always try to look at the charts, historical averages, competition, sector performance, volumes being traded to come to a conclusion about the optimum price range to buy or sell a stock.
Bull Run – Bear Run
Share Market is a cyclical phenomenon. Bull Run will always be followed by Bear Run and vice versa. We will have phases of Bull Run where market keeps rising allowing most of the stocks to give you profits and Bear Run where almost every stock is at loss.
Remember to take advantage of both Bull Market and Bear Market to grow your wealth and save more money.
During Bear Market, invest more money to buy good stocks as almost everything is available at discounted rates. This will help you earn good profits when stocks of price rise. Another way (though a bit risky) to earn during Bear Market is by Shorting – technique where you sell a share at high price expecting the price to fall, and later buy it back at lower price towards end of day.
In Bull Run, remember to continuously book profits at regular intervals by doing harvesting (sell the share and buy them back again within few minutes). This way, if the share price increases, you continue to reap benefits and if the share price falls, you adjust the losses against all the gains you have booked so far.
Understand Trading Terminology
Just doing research about right stocks is not enough. You should also have basic understanding of Trading terminology. One should know the concepts related to Day trade vs Delivery, Margin vs Cash Orders, Limit Price Order vs Market Price Order, Valid Till Cancel vs Immediate or Cancel, Short Orders, Intraday Trading, Stop Loss etc
Cut Your Losses
It is often seen that many investors keep holding onto badly performing stocks for many years in the hope that it will recover and give profit in future.This results in their losses increasing every time the price of stock falls.
Remember that out of the stocks which were part of Nifty / Sensex when it was first launched, very few stocks are still on the list. Hence hoping to hold onto stocks forever may result in you getting zero amount if that company gets closed (good example being Jet Airways).
A better approach is to have a minimum threshold price set for each stock. As soon as the stock goes below this price, immediately sell them and cut your loss.
Understand the Tax Impact
Another thing to keep in mind before investing in stock market is to understand the tax impact. One should be aware of what are Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG)and how they are taxed. Similarly, know the tax rules on dividends which stocks give.
Acting on Tip
Often you hear of a super stock which has given amazing returns and everyone is recommending it. And you blindly buy it without doing your own analysis. This should be avoided.
Everyone’s risk taking ability and loss appetite is different. What suits one may not suit others. For some people, a loss of few lakh rupees may not matter while it may be a huge loss for others. Similarly, few people will not bother if their stock is not performing even after 5 years while many get impatient at the slightest of bear market signs. Some may want to buy penny stocks hoping to become Crorepatis while others may hesitate in loosing money on penny stocks.
So ensure that before acting on someone’s tip, do your R&D and be convinced that the stock is right for you.
Stick to your budget
Many people taste sweet success when they invest for first time in stock. They make profit and begin to believe that they can win the market and continue making profits. As a result, most of them start investing more money in stock market – sometimes beyond their budget either by borrowing or by using Margin trading where the money is basically borrowed from Broker with the intention of paying it back in certain timeframe.
However, you should be careful and avoid this. It is very easy to fall in trap of quick profits and start investing large amounts in stock market. This should be avoided as your budget will go for a toss and you will go in debts in case you loose money.
Stick to your skillset
If you have just started investing in stocks, then ensure that you focus only on Stocks. Do not focus or invest in Derivatives, F&O or Commodity Trading. These are complex and should be dealt only when one is an expert.