Module for Beginners
Introduction to Stock Markets
Dos and don'ts of stock market trading
Starting from the reasons for investing and going through the numerous key players and the processes involved in the stock markets, we’ve come quite a long way, haven’t we? But this is not the end. In fact, we’ve barely just scratched the surface. The idea of this module was not just to give you a fair idea of stock markets and trading, but also to set you up for what's in store in the forthcoming lessons.
That said, considering that you’ve learnt so much about trading and stock markets so far, we’ll leave you with a few pointers about the dos and don’ts in the stock market, particularly for traders and investors who are new.
Things you should do when trading in the stock market
The stock market is like the open sea. The waters are not always going to be calm. You’ll have to deal with a storm every now and then. Don’t worry though, we’ve got you covered. Here are some things that you should do to stay grounded when you’re trading.
Always have a clear goal in your head
Trading in the stock market without a clear goal is like wandering around aimlessly. Nothing good can ever come out of it. That’s why it is always good to set some targets that you hope to achieve by trading. Right from the capital to be used for trading down to the profit objective for each trade, always have definitive goals in place. These goals need not always be precise, but they do need to be fixed. In other words, you can’t keep changing them once you have them in place.
Think for the long-term
Timing the market and buying and selling stocks at the perfect time are notoriously hard tasks. You’d be better off taking a long-term view on stocks rather than trying to churn a quick profit. And while it is not impossible to get quick profits from trading, it does come with its own risks. The chances of trades going wrong are also pretty high. However, by putting your money in the stock market for the long term, you can enjoy more consistent returns.
While putting a large corpus into stocks might get you good returns, it is generally advisable to adopt a more conservative approach. Invest consistently over a long period of time, so you get to enjoy high returns. Systematic and regular investments have two significant benefits: they allow you to utilise the benefit of rupee cost averaging and they also instill discipline in your trading pattern.
Rupee cost averaging is a phenomenon that reduces the average cost of your investment over time when you invest regularly in a stock. Since it brings down the cost, you get to enjoy a greater level of profits when you sell your investments.
Diversify your portfolio
The importance of diversification cannot be stressed enough. You’ve already read about it in the lesson ‘The when and how of investing.’ The principle of diversification is based on the logic that the chances of multiple different sectors and industries going down at the same time are low. When you diversify your investment portfolio, the performance of your investments are not dependent on a single stock or a particular sector. This effectively reduces the risk of underperformance.
Things you shouldn’t do when trading in the stock market
Now that you’re aware of what you should do, let’s take a brief look at some of the things that you shouldn’t do when trading. No matter where you are on your investment journey, to ensure success, always avoid doing the following things.
Don’t take decisions based on your emotions
We humans are emotional beings. We tend to make many decisions based on our emotions. However, when it comes to the stock markets, it is definitely not a good idea to allow your heart to guide you through your decisions. Your emotions can often misguide your trading and investment decisions.
We also tend to be very susceptible to psychological biases. These biases can ultimately end up trapping you in ineffective choices. It is important to identify your emotions and biases and base your trading decisions on logic, reasoning and rationality.
Don’t have unrealistic expectations
Yes, there have been instances where investors have reaped returns of around 300% or more on their investments. Success stories and news about such phenomenal returns may lead you to believe that these are the norm. However, you need to understand that these situations are rare and do not happen on a daily basis. This is why it’s important to set realistic expectations for all your trades and investments. You can then successfully refrain from giving into impulsive and unrealistic expectations.
Don’t get into risky trades
With respect to stock markets, if there’s one thing that you should understand, it is that you don’t have to take on all the trades to make profits. Most investors tend to be impatient and take on unnecessary risks by getting into trades without doing a comprehensive risk analysis. Getting into risky trades in the hopes of cashing in big can end up wiping out your entire investment capital. You would do better in the long run if you just take your time and wait for good opportunities to come by rather than try to grab every single trade.
Don’t indulge in overtrading
Continuing from the previous point, most successful traders do not trade all day, every day. Getting a couple of big trades right is always better than taking on multiple small trades without knowing where they may lead you. Most traders are so focused on making every possible trade. Doing this can end up taking a toll on your mindset. It could even mess with your trading action plan. So, always remember to take frequent breaks. If you’ve managed to make a successful trade, give yourself a day or two off to cool off and start again.
These are some very practical pointers about the dos and don’ts in the stock market. Following close on the heels of this module on the introduction to stock markets is our next module, which gets into the details of investment analysis. Keep reading to know all about how you can perform a basic analysis of your investment options.
A quick recap
- Have a clear trading goal in mind.
- Think about the long-term perspectives of your investment decisions.
- Invest consistently, even if you only invest small amounts.
- Diversify your investment portfolio to minimise your risk.
- Don’t take emotional or impulsive investment decisions.
- Don’t set unrealistic expectations.
- Don’t enter into risky trades.
- Don’t overtrade.