With the economy not in so good a shape, and with ‘work from home’ the norm, a large number of investors have entered the market. Many people are starting out in hopes they could strike it rich and turn some of their savings into wealth. As a stock market newbie, you should learn how to hold the ropes before climbing the mountain.
However, note that dabbling in the stock market for the sake of doing something is not the right way to invest in stocks.
This is your toolkit for starters. Follow them all to the hilt. This will hone your stock-market game, than the also-rans.
PREPARE, PREPARE, PREPARE
A rising tide lifts all boats, and sure enough many stocks have been lifted in this market. But that does not mean that all stocks are good ‘investments.’ Sure, some stocks can run up faster for no reason, and simply because the market is buying them. But that does not mean that you invest in them.
A better strategy is to look for companies that can thrive or survive even in a downturn. Some of the frontline technology companies have implemented ‘work from home’ and continue to deliver good results. Others, such as pharma are needed during these times, so their business will not be affected.
But as tourism and hotels are still shut, such companies may not earn much profits during the lockdown.
So, don’t get fooled into buying anything. Invest only in the companies that have the ability to deliver in bad times.
NURTURE THE WINNERS
This is the toughest thing to do. If you have two stocks, one that has dropped 20%, the other that has gained 20%, which stock will you sell. Most investors tend to sell their winners, and hold on to their losers.
That itself can often lead to more losses. First, note that stocks rise and fall for a reason. If the company is doing well, the market will reward it with higher prices. And vice-versa. Hence, analyse why things are going right or wrong with a stock.
More often than not, holding on to winners is way more profitable.
CAST A WIDER NET
Invest in a wide array of companies across sectors and industries. One of the best things about diversification is that it provides a natural hedge if there is a temporary setback in any one stock or sector.
You have often seen that sometimes one sector moves, and at other times another. Stocks move in and out of favour in the short run, but overall a good company bounces back. Have enough of these stocks across sectors and allocate about 5-10% in them. No stock should comprise more than 5-10% of your list.
Now, this is the most tedious to do, but writing down all that you have done, and why, is really, really, helpful. This will require a detailed account of why you invested in a stock in the first place. Make a note in excel or in a diary the reason why you invested in that stock.
Be brutally honest here. If it’s a stock based on tip, write that down. If it’s a stock based on deep research, write that down.
You will need this to assess the progress your investments have made on ‘tips’ vis-à-vis how your investments have done on your study.
This will be challenging. But doing it regularly will set you up to win in the long run. You will know why your stocks are doing well, and why they are not.
Knowing how the stock market works, and which stocks are “performing” is more important when you are starting out than making a quick buck.
