7 things to know before your first equity investment

Before you start trading, there are certain basic things you must remember. 

If you have opened your trading account and ready to start trading, you are entitled to be excited. However, before you start trading, there are certain basic things you must remember. These basics will not make you a millionaire, but they will ensure that you understand the basics of trading and investing in the stock markets. Equities do create wealth in the long run, but here is what you need to know before you start.

Table of Contents

1. Before you start trading, there are certain basic things you must remember. 
2. The best stock market returns are made in the long run
3. Before you trade, put your stop loss and profit target
4. Track company news and corporate actions closely
5. Don’t ignore transaction costs when investing
6. Low debt and low equity companies are attractive
7. Investors must let their head rule over their heart
8. Like it or not, you must diversify risk

The best stock market returns are made in the long run

You may say that long run is hazy, but the reference here is to a period of 4-5 years. There are occasions when your investments will double in 3 months, but that is the exception and not the rule. Keep your patience levels high and take a long term approach to equities.

Before you trade, put your stop loss and profit target

This is more important for short term traders, but even long term investors must have a mental idea of how much loss they want to take. Stop loss are like insurance and protect with minimum loss. Any trade or investment is a risk-return trade-off. When the stock hits the stop loss, terminate your position and then take a fresh view. This brings about discipline.

Track company news and corporate actions closely

Stock prices are largely influenced by news flows and announcements like bonuses, splits, dividends etc. Track these closely and you can set alerts on your broker website to be updated on such matters. Once you invest in a stock, keep a tab on earnings announcements, corporate actions, industry news, new orders, new innovations in the industry etc. 

Don’t ignore transaction costs when investing

When you buy and sell equities, you not only pay the brokerage, but also pay statutory charges like STT, GST, stamp duty, exchange charges etc. All these costs can add up to quit a bit. Also, remember that the tax payable is higher if you hold stocks for less than a year compared to holding for more than a year. These costs will impact your break-even price.

Low debt and low equity companies are attractive

This should be a guiding principle for your investing journey. In the long term, companies that create value are the ones with low debt and low capital base. IT companies like Infosys and TCS created tremendous wealth due to near zero debt. A low equity base means your profits are going to be distributed across less number of shares. Large equity base can often be an overhang.

Investors must let their head rule over their heart

In short, keep emotions in check while investing in stock markets. It is easy to buy in euphoria and sell amidst panic. That is what most people do. The smart investor buys when there is fear and sells when there is greed in the market. Never panic in markets because, that way, you subsidize the other investor who does not panic. 

Like it or not, you must diversify risk

Some of the finest investors like Buffett and Lynch have spoken about the merits of concentrating your portfolio. That is not for you. Any rational investor must diversify her portfolio and that is what reduces risk of investing. Spreading may reduce returns, but the risk reduction is worth the trouble. It keeps risk in control.