A Beginner's Guide to Stock Investing

The stock market can be either the most favored or the most hated, depending on the situation. The hallmark of a rising market is an increase in herd mentality. If the index rises for 15 days in a row, the urge to buy increases dramatically. If the market falls sharply, calls from brokers are avoided. We are currently in a similar situation. The overall index is down nearly 50%, but the price declines in widely traded software stocks far outweigh that, in many cases reaching as high as 90%. Investors have fled the market and are unlikely to come back, we are told. But can investors afford to flee? We will soon find out why.

In India, people have to save for their retirement because there is no social security system or reliable medical insurance, which is the norm in developed countries. Savings must cover day-to-day living expenses, long-term family obligations such as children's education and marriage, and medical emergencies. It is no wonder that India's savings rate is one of the highest in the world, at 25-27% of GDP.

Moreover, the interest earned from savings has to be higher than the rate of inflation. Otherwise, savings will be devalued over time. The interest rate curve is declining rapidly. In the last few years, the interest rates earned from various banking and government schemes have fallen drastically.

In such a scenario, the stock market comes to the rescue. Equities have always offered higher returns than fixed income savings vehicles. They give us the ability to beat inflation.

However, we often hear stories of people who have suffered losses in the stock market. Where are the profits? Perhaps our attitude toward stock investment is being questioned. Do we perceive stocks as an investment? Or are they like a lottery ticket with a jackpot?

With any investment proposal, you need to evaluate the return you will get over a certain period of time. However, when buying stocks, investors do not have a specific return as their goal, nor do they consider the risks involved.

The stock market is not a place to get rich. However, in the long run, the stock market has usually provided average returns of around 15% to 20%. Anything more than that would be an anomaly. The stock market may rise further, but the real gainers are those who cash in their gains. Don't underestimate a stock market appreciation of 15% to 20% per year. Over time, and with compounding interest, it can make a huge difference.

In order to make money in the stock market, you need to set goals and set stop losses. For example, an investor who wants to earn a 30% annualized return will change his portfolio three times a year, each time with a goal of a 10% gain. Likewise, if a loss of 10% occurs, he must withdraw from the stock. With such a goal in mind, it is difficult to incur large losses. We can also test this theory with a simulated portfolio. Even if you don't make a profit, you still have to set a stop loss, even if it's a purchase for delivery; Demat makes entry and exit very easy.

Investors with speculative tendencies should try their hand at the options market instead of being day traders in the cash market. In options trading, losses can be contained because the maximum amount of loss is the premium of the option and not the entire capital.

Your portfolio should be structured based on how often you need income flows and capital returns. The composition of your portfolio will also depend on your age, status, other sources of income, and risk tolerance. It is wise not to rely solely on the stock market for all your eggs, as the stock market can sometimes be the riskiest investment. People with less social obligations can afford to put more money into the stock market, but for the elderly, allocating 5% of their wealth to stocks is enough. Over time, you will need to build a portfolio that suits your individual needs.

Finally, I would like to caution you about the advice of brokerage firms. Everyone proactively seeks advice from their brokerage firm. However, unless that broker is a registered portfolio advisor, he will not keep track of your portfolio. The broker will only give his opinion about the market and the stocks that are currently popular. The broker's views are essentially short-term in nature. Since brokers are too close to the market, they are susceptible to short-term price movements and changes in sentiment. Also, brokers who do not have a full-fledged research department cannot conduct in-depth research on various stocks and give a long-term view.

In such a situation, it is advisable to track your own stocks. Do not expect your broker to give you a signal. It is your money that is at stake. You must set your own trading goals and manage them accordingly. Even if you bought a stock on the advice of a broker, you have to get rid of it when it achieves your target return. It is not difficult to set small goals.

Don't forget the advice about profit and stop loss. Most of the money lost in the stock market is due to greed and fear of making a loss. We do not sell because we want to wait for the highest price. But few of us can sell at the highest price. It is almost impossible to sell at the exact right time. Likewise, investors are afraid to book losses that have already occurred. So they wait for things to linger and then sell at an even greater loss. Sometimes they wait so long that the stock becomes worthless. To act prudently and be successful in the stock market does not require complicated and advanced knowledge. Investors need to keep their emotions in check. What is really needed is a lot of common sense.