For novice investors, foraying into the equity market can be a thrilling yet challenging experience. The stock market is a complex entity for those viewing it from the outside, but once you understand the rules it functions by, there is a real chance of making your money grow. Before taking a deep dive into the do’s and don’ts of investing in the equity market, let us get some basics out of the way.
What is Equity?
The simplest way to understand equity is to look at it as a fundraising activity that is started by a company. Instead of availing an interest-heavy business loan, a company collects money from the general public. People can then buy a partial share of the said company and this is ultimately what’s known as an equity investment. Once shares are purchased, you receive a dividend of the profits earned by the company.
Equity is thus defined as a stock or share or any other such security that represents a person’s ownership interest in a company. When one owns a company’s share, they are a part owner of the said company.
What are the Equity Options Available?
The two most common options to invest in equities: equity shares and equity mutual funds.
Equity Shares
Equity shares represent a portion of a company’s value and when a company wishes for its shares to be traded in the stock markets, it makes an initial public offering (IPO). The total value of a company’s shares is what represents the total value of a particular company.
Equity Mutual Funds (MFs)
Mutual funds are a collective investment option. The way mutual fund works is money from several investors is pooled and then invested across bonds, stocks, securities, etc. of listed profit-making companies. Simply put, MFs are a diversified bunch of shares from various companies.
There are also other options such as private equity and venture capital, however, these aren’t recommended for first-time investors.
How to Begin Investing in Equity?
Committing to the act of investing money or capital is a major decision in anyone’s life. Hence, it should be entered into with great thought and planning.
The whole idea behind investing money is to create an additional source of income and to generate a sizable amount of wealth for your future that grows overtime and appreciates in value. It is therefore important to understand the first steps of this arduous yet rewarding journey.
Understand your investor personality
Ask yourself these questions repeatedly: “What kind of an investor am I?”, “how much risk am I willing to take?”, “how much capital do I want to allot?”. Answering these questions will help you decide what kind of investments you want to take on, and more importantly, it will help you to envision your long-term wealth goals.
Take advantage of technology
With technology having scaled monumental heights of innovation in the fintech sector, there are a whole lot of options when it comes to getting advice on investments.
Robo-advisor services leverage machine learning technology and algorithms to help investors make the best decisions regarding investments. Combine this with other money management apps that can help you to track monthly investments, expenses and much more. Using aspects of artificial intelligence mixed with human inputs will definitely help boost your financial portfolio.
Opt for blue-chips
Blue-chip companies, which are companies with large market capitalization and are more stable than others, are some of the most valued ones in the market; they are financially stable and well-established. For investors who are new to the stock market, investing in such companies is a safe bet because there is a lower risk factor attached to such companies.
Five Basic Rules to Follow While Venturing into Equity Investments
Some basic rules to follow while investing in the equity market include:
Be disciplined and have a plan.
Although this might sound like an advice from a life coach, it is pertinent in the world of finance as well. Diving head first into the equity market without a plan is akin to financial suicide and absolutely unadvisable.
If you are a first time investor, it is best to have a plan that focuses on your short and long-term financial goals. Once this is in place, an investment strategy that aligns to your needs and goals can be born. Also, investing is only possible with discipline in other areas of your financial life such as monthly savings. Hence, don’t forget to set aside your stipulated monthly savings and stick to expenditure limits as much as possible.
Keep a track of your investments.
Some people might be comfortable with just making an investment and then forgetting about it. However, as a novice investor, it is important to track of how your investments are doing.
Depending on the funds’ performances, it is important to rebalance and shuffle your portfolio as and when necessary. It is also important to stay abreast with financial news and schemes so that you can leverage them accordingly. If need be, there is no shame in seeking help from a financial advisor.
Do not follow that “tip” and avoid herd mentality.
As a first time investor, there is always the temptation to follow the safe path and rally behind other investors when it comes to buying and selling. You might even be tempted to follow hot tips about stocks and funds from friends or colleagues. However, it is not prudent to fall prey to such behavior as it might lead to a dent in your financial portfolio.
It is advisable that you conduct your own research and read up extensively about how the equity market works. Keep up with the pink papers and all the latest news in them and don’t hesitate to combine this with help from a financial advisor.
Always diversify your investments.
The age old adage: ‘don’t put all your eggs in one basket’, is very pertinent when it comes to investing. This is one of the most difficult rules to follow because it is human tendency to keep on re-investing more money into stocks and MFs that might have performed well for you in the past. We do this due to positive past experiences and to avoid risk.
However, the financial world is constantly evolving and what was a safe bet yesterday might not be a good choice today. Hence, it is important to explore newer and more lucrative investing options in order to keep your portfolio updated and growing.
Long-term is the best approach.
Making a quick buck is not really the right approach when it comes to investing. It is tempting to think about making easy and swift profits with investments in stock markets, but if you really want your money to grow for your future, long-term investments are the way to go. When you focus on making profits in 5-10 years, you give your investments the chance to yield higher returns. A long-term approach also prevents you from knee-jerk decisions based on market volatility.
Bottom Line
By following basic rules of investment and educating yourself about the equity market, you are giving yourself a higher chance of success towards growing your wealth. At the end of the day, earning money isn’t just about a 9-5 job and basic savings; it is also about being able to build generational wealth and creating a good life for yourself and your family. Investing allows for this dream to thrive. All you have to do is follow the ground rules and keep learning.
