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6 things a first time investor must know about the equity markets.
The stock market, when unfamiliar, can be a daunting place for first-time investors. However, if one understands equity trading on the market, they have taught themselves a lucrative skill that will be financially rewarding in the long run. Here are six things a first-time investor should know about stock trading with equities.
1. Keep your Long Term Financial Horizon in View
Without a long term goal, your investments will not have a clear target and you are likely to flail around the stock market is highly volatile. Ask yourself what your long term financial goals are, particularly with respect to stock trading. Estimate the investment horizon you need to achieve this goal. Your investment horizon is how long you will continue to stay invested in the stock market. Although equity trading is a lot more short term, having your long term priorities straight will make the stock trading process a lot more streamlined and seamless for you.
2. Understand the Risk you are Willing to Take
Are you an extremely risk-tolerant person? Perhaps you are a young investor with a lot of disposable income. This means you can opt for the high-risk high reward trades that undergo a lot of price movement. Even on a personal level, irrespective of your age and income, you should decide the amount of risk you are willing to take. If this is not clear from the start, you may choose to invest in equities that are way too volatile for your liking. Equity trading can yield long-term returns but the process is not always stress-free. This is why understanding how much risk you can take with your investments is very important.
3. Diversify Your Portfolio
Income should be generated via multiple streams, and shouldn’t just rely on your unstable equity trades. This is among the golden rules of investing. The more diverse a financial portfolio, the more protected it is more taking damage when one or more of your trades are underperforming. Equity should be balanced off with debt, as well as a couple of hybrid funds to offset your investments.
4. Avoid Emotional Decision Making
You might be gripped with fear when you see your stock trading in the red. As a first-timer, seeing an underperforming stock feels like it must be acted upon instantly so you can recover what remaining funds you have. However, the more emotional decisions you make when equity trading, the less yield you are likely to get. This is because your initial gut reaction is not always correct on the stock market. Underperforming trades could be going through a temporary low as a result of market volatility. This is very common with stock trading. If you pull out when your funds are down, you take a hit rather than walking away with the potential returns from patiently waiting.
5. Know the Basics
Equity trading comes with its own set of jargon and analysis tools. Understand what fundamental and technical analysis is, as well as reading basic charts like the volumetric analysis. Know what the terms compound annual growth rate, P/E ratio, and return on equity signify. This way you have a clearer picture of what to invest in and what to avoid. You should also learn the difference between the type of stock market orders you can place. This helps you manipulate the market in the way that best suits you.
6. Avoid Opting for Leverage
Using leverage as a first timer is tempting as it isn’t your own money you will be trading with but your brokerages’. The upside of leverage is that you walk away with huge wins. However, the downside is a massive loss that you will be required to repay your broker. Once you understand the basics of stock trading, leverage can be a viable option to grow your returns significantly.