Open Message to All New Investors: Don't Let The Bull Market Make You A Fool

Article by Sanjeev Sharma

Suppose, we don't know how to swim, we don't know how deep the river is. Despite that, will we dive into that unknown river just because we see someone jumping into it? Of course, we won't.

Okay, let's relate this with the financial market. Here, 'we' refers to "we investors", swim refers to "our ability to do fundamental and technical analysis", "river" refers to "the financial market", and "deep" refers to "the riskiness of the market".

Therefore, before jumping into the financial market, we have to set our own investment plan. We should avoid copying what others are doing because each of us is different in terms of attitude, financial status, age, risk appetite, financial literacy, profession, and so on. Thus, the crux to become a successful investor relies on how well we can recognize ourselves.

So I humbly request to all new entrants to consider the given points seriously before investing in any securities:

1) Basic Necessities First!

First of all, we need to ask the following questions to ourselves:

i) Do we have enough money for basic necessities such as food, shelter, and clothing?

ii) Do we have enough reserve to handle emergencies?

If our answer is yes, then we can move forward to the next point. If no, we have to consider our basic necessities first before jumping right into the financial market. Otherwise, it can have an adverse impact on our living standards as there is always the risk of losses on financial investments caused by adverse price movements.

2) Determine Your Financial Objectives:

Before making any investment decision, we have to clearly define our investment goals. We must be clear about why we are investing. Our answer should not be vague and undefined like "to earn as much as possible" because high returns are always associated with high risks. Our objective must be clear and definite. As we all are different than each of us, our objectives can also largely differ. To understand how we can set our investment objectives, let's take some examples:

Example I: Ram wants to save money for retirement, his objective can be "to save at least an 8-digit figure by the age of 50". In that case, Ram needs to invest in fundamentally strong securities having growth opportunities.

Example II: Anushrut wants to save money for his daughter's wedding. His objective can be "to accumulate around Rs.1,000,000 by the end of 2084 BS". Therefore, he can invest in mid-term securities such as bonds and debentures, which are relatively less risky than common stocks.

Example III: Milan loves to travel and wants to save money for a trip to Goa after six months. His objective can be "to collect at least Rs.100,000 within six months". In such a case, he can invest in relatively safe as well as short-term market securities such as treasury bills rather than investing in mid-term and long-term securities.

3) Analyze and select the best securities

Suppose, Shiba has a medium risk appetite and wants to achieve financial freedom by the age of 45. Investment in common stocks, undoubtedly, will be one of the finest approaches for her. However, the real determinant will be her ability to analyze and select the best stocks among hundreds of scrips. For that, she must have enough knowledge and skill to perform fundamental analysis of available stocks and select the best ones. It means she must be able to interpret the financial statements and key financial ratios of the companies. Even after investing in fundamentally strong companies, she should constantly keep herself updated with any changes associated with the companies, may it be financial changes or non-financial changes like change in management, the effectiveness of executive leadership, plans and policies, regulations, etc.

Let's take another example. Shishir has a high-risk appetite and has some extra money that he can afford to lose. He wants to make a high return on his investment within a short span and he is ready to accept the high risks associated with it. The risk appetite of Shishir along with his good financial position indicates that he can go for short-term trading. However, he has to be skilled enough to anticipate the appropriate time to enter into and exit from the market. It means that he must be prominent in technical analysis.

Besides the above major points, new investors are highly recommended to create a portfolio to diversify the risks by considering their risk-return perspective. However, the performance of all securities in the portfolio may not be as per our expectations. So, we have to regularly analyze how our stocks are performing. If we find any under-performers, we can swap with the new ones and reorganize the portfolio.

Sharma is a lecturer and Program Coordinator at Deepshikha College, Dang.