Most of us probably already know the importance of saving and investing. But how many of us actually look towards the Stock Market as a promising investment avenue? Not many, I suppose. Now that we’re talking about Stock Market Investments, it is but imperative to address a burning question in this regard. When should one start investing in the Stock Market? Pretty easy, if you ask me, provided you base your decision on the following parameters.
1. FINANCIAL PLANNING
Financial Planning forms the most important step towards initiating any sort of investment. Your investments should not put a burden on you. Effective financial planning entails budgeting, cash flow analysis and goal planning. Financial planning enables a person to achieve his/her financial goals and objectives in the long run.
Every individual has certain needs which one meets through one’s income. Only the surplus money left after attending to the basic needs must be diverted towards other resources. Even considering our savings, they should first be invested in important goals such as retirement, education, marriage, etc. That being said, there are three important things to be kept in mind before you invest your money.
(i) POSITIVE CASH FLOW
Do a proper cash flow analysis to determine how and where you’re spending your money. Any surplus or deficit after meeting all your expenses constitutes the balance of cash flow. It is, therefore, very important to have a positive cash flow. If you find yourself spending most of your income without considerable savings, you’ll find yourself in murky waters. It is always advisable to cut down on your optional expenses and give up certain luxuries to ensure a comfortable future life.
(ii) EMERGENCY FUND
Nobody can predict the future. Hence, needless to say, that one should have an Emergency Fund at one’s disposal in times of need. An Emergency Fund is about 3 to 6 months of living expenses set aside in liquid resources to be used in the event of a financial crisis. Before setting aside an amount for investments, it is extremely important to set up an Emergency Fund.
(iii) HIGH INTEREST DEBTS
Many successful people in the world have acknowledged the power of compounding, both positive and negative. Never direct your money towards investments when you have high interest debts to pay off. If the interest that you’re paying is higher than the one that you’re earning, you’re anyway making a loss whilst also keeping your disposable income locked away in an investment. And the longer you take to pay off your debt, the higher is the interest you end up paying. Make investments only after you pay off your huge debts. The Stock Market is a volatile avenue and any loss thereto might put you in the midst of a financial crisis with such huge debts to pay off.
Warren Buffet, one of the richest men in the world and the most successful investor, had started investing in stocks at the age of 11. At that age, most of us don’t even know what the Stock Market is. So, what’s the perfect age to start investing? Well, it’s RIGHT NOW. Of course, you need to fulfil certain other criteria as well, but what that goes to imply is that the earlier you start, the better it is. An early start gives us the benefit of compounding.
Warren Buffet’s first rule of investing is to “never lose money”. Hence, stay away from high-risk options. Instead, go for low risk-low return avenues and utilise the power of compounding through an early start. Short term wealth creation is not everybody’s cup of tea. Long term wealth creation, on the other hand, requires little to no skill. The market will always keep expanding, regardless of the momentary setbacks. Hence, start early and focus on long term wealth creation.
3. KNOWLEDGE AND UNDERSTANDING
The Stock Market is not a child’s play. Sure, novices can also make money through the market in the long run, but to be an efficient investor, it is crucial to have knowledge about the Market. As is often said, knowledge is the best investment. It is but a grave folly to lose money due to lack of knowledge. Uninformed investment decisions can scrap you off your entire wealth in a jiffy.
It takes twenty years to build a reputation and just five minutes to ruin it.
Investments in the Stock Market should primarily be based on the Consumption Theme. Try to focus on the brands that you use in your daily life. Why?, you may ask. Well, in essence, these are the brands that have a strong foothold in people’s lives and in the consumer market. More consumption would mean more revenue and thereby more profits for the company. Higher profits automatically imply a higher share price, which in turn leads to an increase in the company’s market capitalisation. Now, this market capitalisation figure is what drives the Sensex and Nifty points. The higher the Sensex, the higher are your returns.
Also, try to understand the business and market cycles to get a better insight into the working of the Stock Market. For a beginner, it is safer to start with Mutual Fund Investments and then gradually move towards direct Stock Investments with an increase in knowledge and experience. The last option on the hierarchy level, i.e., Intra Day Trading, may help generate huge profits in the short term. But, only the most experienced investors must indulge in this. Start in the right order and you shall not be disappointed.
SOME EXTRA TIPS
1. Invest in businesses that you like or understand. For example, if you work in the Banking Sector, you’re likely to have a better understanding of this sector, hence making investments therein would be more convenient for you.
2. Always be optimistic. That’s Warren Buffet’s first requirement to invest.
3. Avoid overanalysis. With knowledge comes the tendency to analyse each and every possible scenario connected with a particular task. But, if you keep analysing your investment decisions, you may end up missing out on a promising opportunity. Always remember, too much of anything is bad.
4. Never make your first investment from your salary. Stock Investments peddle on people’s experience and expertise and your first investment might not always bear the most fruitful results. Investments made out of profits or past income shift the burden of a possible loss without affecting your daily life.
Investing in the Stock Market can be quite a task. But, if you tread carefully while keeping the above-mentioned points in mind, you might as well just get a knack of it and before you know it, you’ll be an expert, informed investor.
Content: Prachi Prafull
Graphics: Shubham Saurav