BY: Pankaj Bansal Founder at Newspatrolling.com
With a booming economy, stable government and massive foreign investments, India’s stock markets present a significant opportunity for investors. Recently, India’s equity market capitalization reached $4.33 trillion, making the Indian stock market the 4th largest in the world. India is now ahead of the Hong Kong stock market that has a market capitalization of $4.29 trillion. In the coming years, Indian stocks are expected to rise further.
For investors, this seems to be the most appropriate time to invest in Indian stocks. However, as considerable risks are involved in equity stocks, it is important to carefully plan your investment. Here are some tips to do trading in stock markets that will help you reduce risks and optimize profits.
Allocate a budget – Before you start doing trading in stock markets, you need to assess how much funds you can allocate from your income. If you have sizable savings, you can consider using some of it also for stock trading. A quick calculation of your monthly income and expenses will provide you an idea about how much funds you can allocate towards stock trading.
Do not hesitate to start small – If you are just starting to learn stock trading, you can start with small amounts. Even buying a single share and following its market price fluctuations can provide deep insights about how stock markets function. As you gain confidence, you can start investing more in stock markets.
Define your investment goals and risk appetite – How much profits are you looking to earn from stock market trading? Do you have the financial backing to support yourself in case of a major loss? Answers to these questions will help define your investment goals and risk appetite. If you want to play it safe, you can choose stocks of large banks, insurance companies, IT, pharmaceutical, health, real estate, automobile, FMCG and renewable energy. If you want to play the ‘high risk, high returns’ game, you can choose to invest in mid-cap and small-cap stocks.
Do your own research – You can easily find various suggestions for stock investments. However, if you have time, it will be better to do your own research. Go through the company profile, check past financial records, profile of owners, stock price charts of past years, future prospects, etc. You need to do this especially when you are looking to invest in mid-cap or small-cap stocks. Doing your own research will also improve your learning and overall understanding of the stock markets.
Diversify your portfolio – This is the most common advice, but still one of the most relevant. Ideally, the ratio recommended is around 60% in large caps and 20% each in mid-caps and small-caps stocks. However, this can vary based on your investment goals and risk appetite. Also, make sure your stocks are spread across multiple sectors. Although many of the industries are interlinked, the overall impact on stocks may still be different.
Short-term or long-term – If you are looking to make quick profits, you will need more active participation in the stock markets. You can consider intraday trading or look at an investment horizon of a few weeks or months. However, short-term trading in stock markets involves high risks. If you want to play it safe, you should be ready to stay invested for longer periods. A time frame upwards of 12 months will be considered as long-term investments.
Cut your losses – When you are trading in stock markets, you are likely to suffer losses at some point of time. It is mathematically impossible to book profits all the time. When share prices drop, many people tend to buy more in the hope that prices will rise again. However, this can be a bad decision. Especially in the case of mid-caps and small-cap stocks. Always remembers that a Rs 10 loss will be much better than a Rs 100 loss.
Hold on to good stocks – If you have invested in companies that have consistently delivered good results, it will be better to hold on to these stocks. There have been many cases where investors have become millionaires just by holding on to their stocks. A good example is State Bank of India stocks that have moved from Rs 15 in 1999 to Rs 624 as of January 2024. That is more than 40X growth.
Last but not least, make it a habit to invest regularly. The more time you spend trading in stock markets, the better you will become at predicting the markets. With time, you will have a better idea of where to invest and when to exit the market.
