Learnings from stock market — Part 1
While going through studies and investing in the stock market recently, I have realized many aspects:
I am trying to list down some of the crucial points here.
1. Decide who you are — Investor, trader, or Gambler.
Before buying the stocks in the market, we should be clear about the strategy. Am I going to hold for a long time, or will make some profit and exit?
Investor: Looks for the companies fundamentals, type of business before investing in the stocks. He is investing in the company’s business and sits tight for a long time.
Eventually, his investment will grow when the company starts making a profit.
The long term investment always minimizes the risk and volatility of the return.
Trader: looks at the market trend for the short term, buys stocks for a short time to make some profit, and exit on the stocks.
Gambler: Go and buy the stocks on his guts.
2. Decide the objective of investment.
While buying the stocks/financial product, we should have some goal or clear vision first.
While investing, make sure to set goals like retirement funds, buy a house, or make some profit. Choose the right product according to your goal.
E.g. : If it’s for retirement, go for a Mutual fund with SIP or buy an excellent large-cap stocks for long term. Review your investment on a half-yearly basis.
If it’s for the short term, we can buy in some debentures, liquid funds.
3. Understand the power of compounding.
Albert Einstein famously said that compound interest is the most powerful force in the universe. one should understand compounding power while investing for the long term.
When investing for long-term compounding, it helps generate maximum wealth in the last few years of the investment.
Start early and invest for long time.
One should understand The Rule of 72 while investing.
4. Invest in stocks where we understand the nature of business
While investing in stocks or on any financial products, understand what the company does. What is the nature of their business? Is it a leader of the sector like Tesla/Apple ?does the company has any moat factor? Like coca-cola or Gillette.
If the company has many competitors, then the companies profit margin is less has resulted in the company’s profit also significantly less.
We should understand that while buying the stocks, we are buying their business through equity. So we should know about their business. If something happens, we can quickly understand what’s going on and take appropriate action.
These are the companies have their own moat factor.
5. Analyze the company performance yourself. Don’t rely on the third point.
While buying the stocks, we should be able to analyze companies on our own. One should be able to understand the following.
- Fundamental Analysis.
- Technical Analysis.
- Able to read the balance sheet.
- Learn about company management.
It’s very dangerous to buy a share on some one recommendation. Sometimes these recommendations are based on some biases, and it’s their perspective.
Don’t follow investors blindly. We never know when they are selling the stocks and what their strategy is. Research on your own and start to invest small. Once you get some confidence, invest more.
6. Understand the key financial ratio. Don’t mix the emotions.
While buying the stock, we should understand the key financial ratios. These ratios tell us how the company is doing in terms of profitability, Growth, Ownership, Financial ratios, and valuation compare to other companies in the same sector.
We should compare these ratios with the same sector companies because the different sectors have different business natures, so that the ratios are different.
Do not mix your emotions while investing — decisions made should be based on the ratios.
7. Type of growth you are looking.
While investing, we should be realistic about the Goth. When we invest in the long term, we will get a compounded growth of around 12–15 percent.
It’s impractical to get 20 percent growth every year.
8.Investing through a mutual fund is always safe.
If we don’t have time to understand the companies business and follow up on the stocks we bought, a mutual fund is a one-stop solution.
The mutual fund has professional fund managers who look after the investment. Since they are experts in the stocks market, they will make a better decision than us.
There are different types of mutual funds. We should choose based on our objectives, risk appetite, and nature of the mutual fund.
They charge some fees to maintain the fund.
9. Be patient, don’t panic.
One of the key factors while investing in the stock market is to be patient and don’t panic. The market reacts quickly to rumors and global events. Once the news starts clear, it will be back on track. It’s essential not to panic and understand the situation.
Sometimes we need to take uncertainty as an opportunity. Because in an uncertain time, will get good stocks for a lower price.
10. Go with companies who leading the industries(Large-cap)
Investing in companies who are industry leaders always a better option. These companies usually drive the industry/sectors.
Most of the industry leader belongs to large-cap their fundaments, and key ratio’s always better.
It’s less risky and volatile.
For Learnings from stock market — Part 2 lookout here.