The stock market can be a highly rewarding place to make a lot of money. If a person invests smartly, then people of all ages and background can get massive returns. At the same time, it can also be fierce if the investor is not smart or disciplined. At times, it is essential to have the self-control to resist the lure, whereas, at other times one needs to be brave and take a risk or two. It is finding the perfect balance which makes the difference.
This can be particularly a difficult practise for the younger generation. This modern generation or the internet generation has grown up in a fast-paced society. Hence, patience is often not the virtue that many possess. As a result, there have been several cases where youngsters have failed in the share market. This creates a sense of fear in their minds. However, such a negative situation can easily be avoided if more youngsters follow some basic rules of the share market. The following are 7 basic rules of investing in the stock market for youngsters:
1) Stop Following Others:
It is generally a trend among the youngsters and the elderly alike. Many people make the mistake of falling prey to the herd mentality. Simply put this is a phenomenon where you buy stocks or shares because your family members, seniors or friends are buying them. This is not the best of strategies because it can backfire and you may end up losing your hard earned money because of a decision which was not even made by you.
2) Background Check:
The beginners in the share market or the youngsters often buy stocks because they are big companies and automatically assume that they are safe because of their brand value. However, when aiming for stability, what the youngsters end up doing is miss out on attractive options which have a higher return value. At times, even big companies fail. Hence, proper background analysis and research are critical before anyone buys stocks of a company, especially if the quantity is large.
3) Basic Business Knowledge:
One should not look to invest just in the stock. There is a need for the investors to look at the broader picture. One can only take a decision as to if the person thinks the stock will perform well on the basis of the information he or she has and how thoroughly the individual can analyse it. Hence, investment in businesses about which the investor is clueless is not a good option. Then it becomes more of a lottery and less of the stock market. The difference between the two should always be clear to the investor.
4) Disciplined Approach:
Market volatility is something which is part and parcel of the stock market. Youngsters should accept this fact and plan accordingly. It has often been mentioned that more people lose money during the market downturns than when it is on a high streak. This is because the investors, more specifically the new investors have the tendency to panic under such circumstances. This kind of panic more often than not leads to a loss. Hence. It is better to go for the long run and not worry about the short-term volatilities. Legends like Warren Buffett have also advocated this philosophy, and millions of people across the globe have benefited from this.
5) Keeping Emotions in Check:
Stock Market is not a safe place for those people who are easily swayed by emotions. Two emotions which can hamper even the best laid out stock market strategies include greed and fear. Most people and youngsters are guilty of both of them. They tend to over-invest in stocks often expecting miraculous results. Similarly, when the market suffers, these investors panic and try and save themselves from losses. This is not a wise move because by doing so, they are actually reducing their return potential.
6) Build a Broad Portfolio:
This is one advice which is extremely popular among most stock brokers and sub brokers. Most experts believe that having a broad portfolio takes care of many problems. One of the biggest advantages of diversification of the portfolio is the reduction in risk. It is a win-win situation because a broad portfolio gives the investor a chance to get optimum returns without undertaking too much risk. However, it must be remembered that depending on an individual’s risk appetite; the portfolio too can be diversified. So, if you have a financial advisor, then it is best to discuss these things with him or her before deciding on a specific strategy for building the right portfolio.
7) Set the Right Expectations:
One of the reasons why many beginners or youngsters quit the market is that they set unrealistic goals for themselves and end up feeling dejected too early. It is good to be optimistic, but if an investor expects only the best, then it can be a hurdle. This is because even when the investor gets decent returns, he or she is not happy. This, in turn, impacts their motivation and morale. On the other hand, if their stock underperforms, then it often devastates the investors. Hence, it is best to set realistic goals, keeping in mind the overall market condition and other critical elements. This is also a healthy practise in the long run.
Apart from the aforementioned rules, there are also some other safety rules which should be followed by the youngsters to make the most of the stock market opportunities. One thing in particular which should be avoided by the young investors in the market is to try and time the market. This has backfired for a high number of investors and hence should not ideally be tried by the beginners as this could result in losses. Among other rules, the investor should make a habit of monitoring the latest news and trends related to the stock market. This will keep the investor up-to-date, thus putting him or her in a better position to make a good decision.
In the beginning, it is also advisable that the investor only invests the surplus funds. Ideally, funds which the person can afford to lose. In case of hard-earned savings, it is better to opt for safer investment options.