Cautious steps to take while entering the stock market
Everyone parades the astronomical returns they clock in the share market when it’s bullish. But investors make profits as well as losses in the stock market, it is as risky as the high returns it promises. As a beginner investor, it would do well if you were conscious and cautious about every decision you make while entering the stock market. Here are some broad rules you should follow when entering the stock market.
Financial Situation: Before entering the share market, sit down and ponder over your financial situation. If you haven’t already, make a financial plan. Begin with figuring out your goals and risk tolerance. If you don’t understand what investing and trading entail, research them. With clear goals and careful planning, you can ensure financial security. Also, decide how much risk you are willing to take.
Emergency Fund: You should have enough liquid money to cover an emergency like an accident or sudden employment. A thumb rule is ensuring you have up to six months of income in savings that you can use anytime.
Avoid rumour buying: Avoid buying a stock just because someone asked you to or because everyone is investing blindly. Whether they are your friends, family, or broker, do not invest anywhere until you’ve done your due diligence.It is your money, and you should be cautious about where you put it.
Define profit: Everyone’s definition of profit is different. It is good to consider your definition, especially if you’re considering investing in volatile stocks or trying your hand in the derivatives market. Knowing when to stop is more important and a cautious and conscious decision you will have to make to avoid giving in to your greed and ending up losing money on a volatile asset.
Use stop loss: this is one thing you should learn about while conducting your due diligence, but it is important enough to warrant a separate mention. A stop-loss allows you to limit your losses per your risk appetite and it comes in handy when you want to restrict losses beyond a point. It will protect you from incurring heavy losses.
Be Cautious of Leverage: When the winds in the market are blowing in your favour, you might want to take advantage of it by borrowing funds to execute the trade. It’s not wrong, per se — leverage can help you make profitable trades. But one, it is not for beginners; and two, they are highly risky. If you are intent on going down this way, remember to set money aside for your emergency expenses.
The key is to go back to your needs, time frame, asset allocation, and risk profile often and adjust your portfolio accordingly. Always keep an emergency liquid cash on you should the markets become bearish, and you lose capital.