What happens when you share your intention to invest in the stock market with your friends or family? More often than not, we get bombarded with tons of advice surrounding what and how to do, right??But who tells us what?not?to do??
Seldom are we given advice regarding what to avoid when investing in the stock market.?So let¡¯s help you in that aspect by simplifying what not?to do when investing in the stock market.
Also Read:?How The Stock Market Crash Of 1929 Led To World War II
"Stock market investments are subject to market risk. Please read scheme-related documents carefully before investing."?
Almost every one of us must have heard or read this disclaimer when watching stock market advertisements. But we are seldom able to understand and implement it.
When dipping your feet in the stock market, it's absolutely crucial to be aware of the risks surrounding both an investor as well as the stocks. Yes, you read that right. The risks involved as an investor, include market risk, interest rate risk, company risk, regulatory risk, liquidity risk, taxability risk and inflation risk. Click here to know in detail about these.
On the other hand, there are sector-specific, company-specific and some universal risks associated with stocks. The latter includes headline risk, credit rating risk, risk of obsolescence, detection risk, interest rate risk, inflation risk and commodity price risk.? Click here to know in detail about these.
Can you build or imagine a tall and strong building without a solid foundation of the appropriate cement, iron pillars and other raw materials? No, right? Then how can you build a strong investment portfolio without having the foundation of an emergency fund in place?
And what could have been a bigger wake-up call than the last two pandemic-hit years to make people realize the importance of having a rainy day fund??
From losing our jobs, getting ill for weeks or even months, to watching our business come to a standstill, all this has pointed towards the possibility of any adverse event in life having the capability of impacting our income. In such scenarios, the absence of an emergency fund makes everything worse, as you don't have a financial backup to fall on during income disruptions. This can, at worse, make you even struggle for survival, besides struggling to pay existing loans or other debts.
So, it's essential to maintain an emergency fund amounting to at least three to six times your recurring monthly expenses like EMIs, rent, SIPs, utility bills, insurance premiums?etc. This will help you sail through periods of temporary income disruption like sudden job loss, severe illness etc by taking care of your vital expenses.
Also Read:?Understanding How The Stock Market Works
We have all heard the adage 'never put all your eggs in one basket'. This holds especially true for stock market investors. Solely relying on a single stock or similar stocks of a specific sector is often what deprives most investors of the benefits of diversification.?
But amidst the effort to hold multiple stocks to diversify, many investors end up mistaking duplication as diversification, without even realizing it! When diversification is mistaken as duplication, it leads to the formation of an inappropriate portfolio or basket of stocks.?
Remember, diversification implies investing your money in stocks of different sectors and companies, whereas duplication refers to the action of creating a stock market portfolio involving similar types of stocks of the same sectors.?
So instead of having all stocks of the IT sector, or pharmaceutical sector, have a mix of stocks of different sectors to facilitate diversification. This helps in reducing the overall risk of the portfolio.
And that's not all. Even post creation of a diversified portfolio, it¡¯s always prudent and equally important for investors to periodically review the portfolio.?
Do not restrict this task of portfolio creation to just a one-time activity. Develop the habit of reviewing the stocks¡¯ performance periodically, maybe quarterly, bi quarterly or semi-annually basis. This will help in tracking the performance and ensuring the portfolio is in alignment with your goals and investment horizon. If the existing performance of the stocks or expected trends does not seem in favour, you may have to rejig the portfolio with the appropriate stocks to help you achieve the set goals timely.?
This is amongst the worst blunders many stock market investors tend to commit. When the stock market is bleeding red, resorting to panic selling is probably the biggest thing you should ¡®not¡¯ do.?
Avoid following the crowd and impulsively do what most others are doing. Then what exactly to do during market crashes? Well, it's the opposite of selling. You should ¡®buy the dip¡¯ and turn the adversity into an opportunity! Click here to understand this in detail.
The twin emotions of greed and fear are amongst the biggest enemies of an investor. That's why getting swayed by emotions during decision making is a ¡®big no¡¯ for every investor.
Remember that greed leads you to spike up your investments during bull market conditions when high valuations should rather worry them. On the other hand, fear is what often leads investors to redeem existing investments or stop making additional investments during market corrections or crashes, when equities are actually available at attractive valuations.
Also Read:?Crazy For Crypto? 20 Terms You Must Know Before Investing In Cryptocurrency
For more of such interesting and simplified financial content and news,?keep reading Indiatimes Worth.?Click here.