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Which factors must you be aware of before investing in stocks?

The stock market operates under a set of rules that many people, especially new investors, tend to ignore. Focusing on five necessary factors before embarking on your stock market journey helps

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Shailesh Khanduri
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Investment Stock market Personal Finance

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New Delhi: When it comes to asset classes, investors' primary goal is to generate high returns on their investments. Start investing in the stock market if you want to invest in something that will outperform inflation while also providing a good return.

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Many investors have profited handsomely from the bull market run, which has been fuelled by investor sentiment, but this is not always the case. Many investors fail to recognise that, while it is simple to enter the stock market, it is not always financially viable to sustain over time.

Most people have good intentions, but a lack of necessary financial education jeopardises their chances of profiting from stock market movements. The stock market operates under a set of rules that are largely ignored by most people, particularly new investors, so here are five things to keep in mind before embarking on your stock market journey.

Pick companies and not stocks

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When you buy a share of a company's stock, you become a part owner. When buying or selling stocks, don't rely on hunches or tips. Learn to evaluate market fundamentals as well as listed companies.

Never try to predict the next possible move in the stock market while investing in it, or it will lead to disaster. You may be fortunate on some occasions, but not always. The first step is to educate yourself on the market and how it operates.

Focus on slow and steady portfolio building

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Begin your stock market adventure with small investments and gradually increase your investment as your knowledge and confidence in your abilities grow. Do not invest all of your earnings and savings at once because, as is often said, greed and overconfidence can lead to catastrophic mistakes. That is why you should always diversify your holdings, which means you should never put all of your money into one investment. Stock investments carry numerous risks, and there are no guaranteed returns, so proceed with caution.

Don’t get emotional

When investing in stocks, you must maintain logic and rationality. Don't get too attached to a single company. When making stock selections, keep your emotions at bay. A sudden surge of emotions has caused many people to buy unwanted stocks or sell them in a huff. Many investors have lost money as they relied on tips from social media influencers. The inability to gauge real information from unjustified rumours regarding stock movements has made it difficult for many investors to control their emotions and get rid of the cycle of fear and greed.

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Learn the risk-return concept. Understand how much risk is required to garner necessary returns. Unless you know the risks involved, do not dabble in speculation or buy stocks of unknown companies enticed by their stellar past performance. Don't panic and sell your stocks at rock-bottom prices during a bear market.

Right asset allocation is the key

Never put all your money in a single stock or sector, no matter how confident you are in its performance. Make a well-diversified portfolio to help you reduce risk and avoid losing money if your stocks underperform. Over-diversification must also be avoided, as going beyond a certain point will mar the effectiveness of your investment from experiencing enough returns.

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Don’t try to time the market

The use of borrowed funds to carry out your stock market strategy is referred to as leverage. While it may seem like a good idea when the market or your stock is rising, consider what will happen if the market or your stock falls. Not being conscious of your losses will only erode the value of your investments in the long run, thus, also forcing you to repay the money that you had borrowed to invest. Limit your risk when you first start to ensure long-term profitability.

Also, remember that no one can successfully and consistently time the market by identifying tops and bottoms across multiple industries or stock market cycles. Invest small amounts of money over an extended period to average the market and profit in the long run.

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Long-term investors who focus on investing in the right stocks continue to generate exceptional returns on their investments. As a result, patience and a disciplined investment approach are advised, as well as maintaining a long-term goal.

To summarise, you can manage stock market volatility only when you have acquired the necessary skills through education, experience, and perseverance. Do not take unnecessary risks with your money; instead, treat the stock market like any other business.

Have reasonable expectations from your investments and plan appropriate strategies accordingly. This includes deciding what and when to buy and sell your stocks. You must never allow your affinity for a specific stock to get in the way of planning your investments, which means you should be willing to sell your stock holdings if necessary.

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