5 Things To Know As A First Time Investor
Life today is expensive and getting costlier. Education, housing and other costs of living are certainly not getting any cheaper. Your savings will only take you so far and thus, financial planning and investment have become a necessity today. Education planning in India is getting popular, especially for parents looking to send their kids to study abroad without taking out education loans.
If you are a beginner investor, thinking about child investment plans or other strategies, here are some things you should know.
1. Invest with a Plan
You should always invest with a plan. It is very important to be clear from the get-go about what your financial goals are. Investments for a house, investments for buying a car, investments for retirement, and investments for child education – are all very different financial goals. Some financial goals require short-term planning while others require planning long-term.
For example, buying a car is a short-term goal, while creating a proper education plan for your child or planning for retirement are long-term goals. A diversified short-term investment plan is much more suitable for the former and a long-term investment scheme will be more useful for your long-term goals.
If you are a beginner, it can be a good idea to invest with a financial service that manages your investments for you. A personalized and customized financial plan created by experts is useful when you are short on time or expertise yourself. If you want to create a solid education plan for your children, you can invest your money in mutual funds and ETFs through EduFund.
2. Educate Yourself About the Stock Market
While it may be tempting to leave everything to the experts and rest stress-free, that is not a very good attitude to have. You should educate yourself about what you are investing in and why. A lot of beginner investors follow trends and invest in whatever is being talked about the most. There is a chance of this being profitable in the short term but this definitely not a good long term strategy. For that, you will need to educate yourself on the stock market.
You need to understand how the stock market works and what it means when a stock rises or falls. What is a stock and what does it mean when you buy a stock? You should also educate yourself on the jargon. What is BSE, NSE, Sensex, Nifty, etc? What is the difference between investing and trading?
First-time investors also need to specifically look at what they are investing in and learn as much as possible about it. If you are investing in ETFs, it is important to first understand what an ETF is and why they are so popular with beginner investors.
Sometimes, experience can also be a teacher. When you enter the market as a rookie, you may make mistakes and suffer losses. Take these losses as a learning experience to understand what to do and what not to do. Knowledge is your friend when you are an investor and not all of this knowledge needs to be bookish.
3. Understand Market Risk
When you invest your money into the market, you can either make a profit or suffer a loss. The more money you have invested, the more your exposure and consequent risk.
Volatile or trendy stocks and options can be risky. Balanced mutual funds, real estate and high-income bonds are relatively low risk. Bank savings deposits, fixed deposits and government bonds are the lowest risk investments. As an investor, what you need to do is determine how much risk you are willing to take.
Invest in What You Know
It is always a good idea to start slow. Do not speculate too much too quickly. Rather, plan things out and invest according to your goals. Your risk tolerance will also differ depending on your financial goals. If you are investing to fund your child’s education plan, which is an expensive, long term investment, you should not take unnecessary risks.
Diversification is a great idea to lower risk as this ensures that your invested principal is not tied up in only one thing. This balances out your risk. Investing in ETFs and mutual funds is a great way to do this. These funds are already diversified and their investment portfolio is structured and balanced to ensure relatively lower risk.
4. Invest in What You Know
We have recently seen big booms and falls in the prices of certain stocks like GameStop. A lot of people invested in these stocks due to the hype and media attention. While many of them made huge profits, when the stocks eventually fell, many investors ended up losing a lot of money as well.
This is a great example of what happens when you invest out of herd mentality, without fully understanding what you are investing in and why. While these types of investments can be good for a quick and sudden cashfall, they are completely inappropriate as a long term investment strategy.
When you invest in a stock, you purchase yourself a stake in the company. As a stakeholder, you should do your due diligence about the company and its stocks. Understand how the company makes its money and stays profitable. If you don’t do this, you will not be able to predict or understand when a company’s stock may fall and put you in a financial crisis. If you don’t understand how or why a particular stock shot up, it’s not a good investment.
5. Stay Calm
This is perhaps the most important aspect of investing. The stock market with its highs and lows can lure you into making impulsive, emotion driven decisions. It is important to have self-control in these matters and stick to proven investment strategies rather than variable market trends.
It is also equally important to understand that short-term market fluctuations, by and large, don’t affect your long term investments in the long run. With financial goals like education plans and home-ownership, any rise and fall in stock prices can make you nervous. But it is important to have faith in your long term investments. If you have done your due diligence and research in picking the right plans and strategies for yourself, the only thing you need to do is relax and keep faith in your investments.
Investment is a strategy for creating wealth in the long term and requires patience, faith, knowledge and planning. It is important to educate yourself as much as possible about all relevant issues and keep in touch with experienced advisors and analysts. With good advice, planning and a solid portfolio, investing can help you achieve your life goals and dreams.