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First-Time Investor? Here Are Three Things You Must Know Before You Invest

May 24, 2018 | 2 years ago | Read Time: 4 minutes | By iKnowledge Team

Vishnu has just started working and is looking for investment options. He is new to the process of investing and is researching on how to manage his investments well. Vishnu gets a lot of advice from his family and friends. However, he wants to be sure that his investments are made in the right direction for fulfilling his financial goals. What Vishnu needs is to test the investment waters before he decides to invest a large sum of money in the twisting avenue of stocks.

That’s why, if you are a first-time investor just like Vishnu, at first, you should start by investing small amounts of money in different investment instruments to get acquainted with the system.

When Investing in Stocks for the First Time, Remember to Limit Your Options

To properly diversify a portfolio, experts suggest buying at least 15 different stocks across several sectors. However, if you are starting out, choosing to invest in stocks only may not be practical. There are many factors that a first-time investor needs to consider when choosing from a wide variety of stock options available:

  • The Capital Risk: One of the biggest reasons that first-time investors fail early on is because of poorly planned investments. Investments in the stock market should only be done with capital that can be risked. The stock market guarantees no fixed returns in general. It is only through thorough financial planning and extensive market research that an investor can generate returns on their stock investments.
  • The Safe Risk: First-time investors are bound to hurt themselves if they nosedive into the stock market to begin with. There are other, safer investment vehicles available to choose from. These options are a stable source of capital growth that remains mostly unaffected by the market’s volatility. Fixed Deposits, Recurring Deposits, Public Provident Funds and ULIP not only provide returns over the long term, but also encourage saving and financial safety.
  • The Safer Market: Tips for first time investment by experts suggest that it is wise to begin with safer market investment options like Mutual Funds, Equity Shares, Bonds, IPOs and such.

Research, Research and Some More Research

A casual approach towards investing in the stock market can lead to heavy losses for first-time investors. Investing in the stock market requires discipline, patience and proper strategy. It is important that you take careful note of the following points before investing in the market.

  • Rigorous monitoring of the trends: The market is influenced by various factors that impact on its value. From the impact of a good monsoon to the internal working of the company’s stocks you invest in. These trends are always tracked by market professionals and prediction models are made. Stay updated about them through various resources available both online and offline.
  • Proper analysis: Once you start to track the trends that impact your prospective investment option, you start to see patterns through practice. Fact-check these patterns to understand market behaviour and volatility. There are various courses available that could teach you how to understand market analytics.
  • Technical research: Data concerning the market can be found in the form of charts that depict the interaction of various trends on the market. Decoding these charts is the key to success and requires analytical and technical skills. Research is the key to winning the stock market. First-time investors must first discipline themselves to understand the working charts above anything else.
  • A good understanding of business: The volatility of the market comes from the rise and fall of businesses. It is important to understand how businesses work, both internally and externally to determine which way the stock market is going to progress.
  • Constant updates on the market and economics: Investment in knowledge is the best investment a person can make. The more you learn, the better you invest. Staying updated about the market and the economic climate around it will help you prevent heavy losses or capitalize on opportunities as they come.

Red Flags that First-Time Investors Should Watch Out For

Before you think about investing in a stock, assess the company’s financial records for potential red-flags. The following tips for first-time investment over red flags should be carefully noted:

  • Consistent decline in earnings: Companies show a decline in earnings from time to time depending on factors like competition and uncertainty. However, if a company shows a consistent decline in their revenues over several quarters, then it’s a sure sign to avoid investing in such companies.
  • Rising level of Debt: Debts are a good way to generate project investments and provide a higher chance of returns on equity. However, it has the risk of rising in the case of unforeseen circumstances like an economic crisis. Too much debt could be a sign of the company going bankrupt. First-time investors must look at how much a company is paying to clear debts before investing.
  • Switching Audit Firms: Companies switch audit firms from time to time to either find one that charges less or when they are up-scaling their business. They do it to show due diligence to their shareholders as well. A sudden switch in auditors could mean trouble between the accounting and management teams. Audit reports are a sure way to check a company’s financial health and should be taken into consideration before investing.
  • Institutional Sales are a trap: When big players in a company start to jump ship by offloading huge chunks of their shares, it’s a sure sign of an oncoming bankruptcy call. First-time investors are advised to stay away from such stocks.

To conclude

The early bird gets the worm, they say and the same principle applies to investing as well. There will always be factors that will slip under your nose or go unnoticed. Continuously absorbing information about the market working, evaluating stocks, and other investing topics is the smartest advice that can be given to an investor. Your portfolio, as well as your investing skills, will increase over time if you follow this.

Advt. no.: IA/May 2018/3971


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