Rakesh, a 27-year-old IT professional, had lately begun investing in the stock market. He learned about a relatively new firm from a coworker, and after checking the returns for the previous three months, he placed all of his savings in it without researching the stock or market patterns.
After a few months, the market, particularly in the area where that particular company operated, saw a minor correction. That corporation was heavily in debt and was unable to weather the storm, and its stock price plummeted by 70%. Rakesh had lost all of his money.
Ramesh, who had spent his life studying market sentiments, bought in equities where the PE ratio, EPS, long-term growth tendency, beta of the company, and other factors were favorable and long-term viability was assured. Ramesh also invested evenly in a range of enterprises with varying returns to average out the total returns.
During market downturns, Ramesh was able to keep his portfolio afloat with little impact since he had worked hard to create a well-diversified portfolio that minimized risk-related losses. Furthermore, when decisions are made based on fundamentals, returns are less volatile.
Basics of stock markets
From the above two examples, it can be implied that Stock markets are not for the faint of heart, and investors must proceed with caution in learning the fundamentals of stock markets.
Investment decisions should be made based on criteria such as the investor’s investment horizon (short/long term), cash flow requirements in the near future, the investor’s age, household income, and so on. Investors can invest their money in bank FDs, corporate FDs, capital markets, company bonds, mutual funds, and so on based on the above considerations. There should be no rush to make short-term gains because the higher the short-term return, the greater the danger.
Diversification is the key to investing since it not only helps to average out risk but also helps to generate a minimum average threshold return, providing an acceptable and good rate of return for the investor. Investors should balance their portfolios such that there are some low-risk, low-return stocks and other high-risk, high-return stocks, allowing the portfolio to achieve average returns. To secure consistent annual income from the investment, the portfolio should also include a few high-yielding dividend equities.
Investors must conduct thorough research into the markets and avoid falling prey to short-term market indications. Also, the rule of “don’t put all your eggs in one basket” should be followed in its entirety, since we are all aware that markets are quite unpredictable, and maintaining returns in these circumstances can be difficult.
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