Learn how a budding stock investor can avoid common mistakes and save himself a lot of time, effort and money
08-Jun-2021 •Vibhu Vats
So, you have decided to start investing in the stock market - on your own. You have decided not to go the mutual fund route [alone] and you want to test the waters yourself. Not a bad idea, I must say. Peter Lynch, the legendary stock investor, said, "Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it." So, you can indeed invest like a stock market rock star. However, there are a handful of things you must know before you dive into the stock market. You can save yourself a lot of time, effort and money if you follow the advice in this article.
1. Get trading and demat accounts
You will need a stock-trading account and a demat account to start investing in the stock market directly. There are many brokerage firms, and you can choose among them. One of the easiest things you can do is contact your bank. Most banks provide brokerage and demat services. Since you would already have an established relationship history with your bank, you might feel more comfortable doing this.
2. Opt for an online trading account
You can place your stock-purchase orders over the phone or online. An online trading account brings a lot of transparency into your transactions. With an online account not only can you place orders yourself, you can also track what is happening to your order in real time. Also, never let the broker or anyone else trade on your behalf. You should be the only one who has access to your stock-trading account.
3. Be cautious of broker advice
The moment your stock-trading account is opened, the broker would like you to opt for many services it offers, including regular stock tips and guidance. What you must appreciate is that your interests are always secondary to the broker. He has his own interests in mind, which are related to your trading frequency. So he would want you to trade more. Nassim Nicholas Taleb eloquently stated, "Never take advice from anyone in a tie. They'll bankrupt you. Don't ask a general for advice on war, and don't ask a broker for advice on money." Never feel compelled to buy and sell as per your broker's advice. Rely on your judgment, analysis and research.
4. Keep records
Your broker should send you a contract note for every trade you make. You should verify it and archive it. It is the proof of the transaction. Also, you should make a note of your buying prices and dates, selling prices and dates, profits and losses, quantities bought and sold, etc., in an Excel sheet. This will not only help you track your investment results and pay taxes but will also bring discipline to your investing approach.
5. Start small
Start investing with a small amount of money. Since you would be learning during your initial phase in the stock market, it's better that you commit smaller sums of money. Even if you have a large corpus to invest, go slow. Once you have gathered ample experience and are confident of your ability to invest successfully, you can increase the allocation.
6. Invest in education
Benjamin Franklin said, "An investment in knowledge pays the best interest." You can't be successful in the market unless you invest in educating yourself about it. Knowledge about how stocks work will also prevent you from making costly mistakes. You will also learn about the right methods of investing in stocks. One of the major reasons why many stock investors don't do well is that they don't make any effort to learn. There are many good books around that you can read, such as One Up on Wall Street, The Intelligent Investor, What Works on Wall Street and so on. Learning from stock gurus is a very effective way to be successful in the stock market.
7. Stay away from stock trading, derivatives and stock tips
Stock trading is the pursuit of making quick profits by profiting from the fluctuations in the market. Most stock traders lose, so it is not a worthy pursuit. Invest for the long term in the stock market after doing thorough analysis and research.
Also, don't be carried away by futures and options, which are collectively called derivatives. Derivatives use leverage and can dramatically increase your returns. However, they can also wipe off your capital in a matter of moments. Most derivative traders lose, so keep away from derivatives. Derivatives have the potential of tearing down the entire financial system, which made Warren Buffett call them 'weapons of mass destruction'.
The new stock investor should stay away from ubiquitous stock tips. The stock market sees a lot of speculation and stock tips are generally circulating around. These stock tips are generally not reliable and aren't a surefire way to make profits.
8. Keep an emotional check on yourself
Someone rightly said, "The best investors in the world have more of an edge in psychology than in finance." As a new investor you will experience an entire gamut of emotions when you see fluctuating stock prices. You would be tempted to book profits instantly if your stocks gain in value, and you would have a sinking feeling when your stocks fall. Many people start behaving irrationally when they see ever-changing stock prices. A fall in stock price is a normal occurrence, and you should not sell a stock in order to make a quick buck. Buying and selling stocks should be based on your stock strategy, which is the point below.
9. Devise a strategy
Once you start operating in the market, you will need a stock strategy that clearly tells you what to buy, when to buy, when to sell and how to track progress. In the absence of a sound strategy, your stock market career will be more like a ship that has lost its way. One day you will do this and the other day that. Your stock strategy is the ultimate filter which will safeguard you from the noise in the stock market. You can keep refining the strategy as you progress with investing. The books that you will read on stock investing will help you with your strategy. However, the major help in preparing your strategy will come with your real-life experience in the market. Since you would surely be making some mistakes, it has been advised that you start small.
Don't expect magnificent results from day 1. Initially, you may also lose some money. Yet persist in your pursuit. Combine stock investing with sound money management skills. Invest regularly. There are many people out there who know a lot about stock investing but who are never able to build wealth because they seldom have money to invest. In any form of investing, discipline and regularity are the most important determinants of success. Warren Buffett put it well when he said, "We don't have to be smarter than the rest. We have to be more disciplined than the rest."