TomorrowMakers

One way to lessen investment risk is to diversify - and to do this, you can invest in multiple assets over the short-term, medium-term, and long-term.

5 Tips to follow while trading in stocks

It is not uncommon for someone new to investing in the stock market to view any advice as a distraction from the goal at hand, which is to make money. That is a mistake.

Trading is like a business and should be treated as such and not as a hobby or a job. So, just as there are dos and don’ts to follow when running a business, there are rules when it comes to trading too. 

If you are new to investing in the stock market, you should learn everything you can about this business and perhaps follow the guidelines given below:

Also Read: How To Identify Stocks For Intraday Trading?

1. Put a business plan in place

When you start trading on the stock market, you are like a trader or a small business owner in a regular market. Businesses entail expenses, losses, taxes, uncertainties, stress, and risk, which can be met if there is a business plan and the business’s potential maximised.

In trading, this ‘business plan’ is a written set of rules that specifies a trader’s money management criteria for every purchase. Let such a trading plan be your template.

2. Avoid overtrading

A trading plan or business plan can guide you on how much risk you can take based on your risk appetite. It tells you the number of trades that are appropriate for you - that is, it sets a limit and helps you stick to your plan.

However, if you indulge in excessive buying and selling of stocks, going beyond the number of trades set for you, you will be overtrading. This often involves taking unnecessary risks and can undermine your investments.

Related: 6 Common Stock Trading Mistakes You Should Avoid

3. Learn from experience

As with any business, you are expected to protect your capital. This does not mean never making losses because that is part of the game and to be expected; it only means not taking unnecessary risks that could upset your investments. But if there are losses even if you followed the plan, don’t panic. Just bail out and start over while sticking to the plan.

What this also means is that if you take trades outside of your trading plan, it would be a poor strategy even if the trades turn out winners.

4. Diversify your investments

One way to lessen risks is to diversify your portfolio. This involves having many investments spread over multiple assets - over the short-term, medium-term, and long-term. Asset allocations can be considered in the following mixes:

  • Bonds and cash: Returns are low, but they are liquid, allowing a quick withdrawal if needed. This will be a short-term investment.
  • Stocks and bonds: The balance of stocks and bonds can vary as per your risk appetite. An aggressive investment can be 80:20 (stocks:bonds), while a conservative approach can be 20:80 (stocks:bonds). Basically, the more the risk, the greater is the potential return;
  • Others: You can look at other investment options like real estate, gold, hedge funds, etc.

    Related: How Women In India Can Invest In Individual Stocks?

5. Study the markets well

Understanding the markets is an ongoing process. Global politics, events, economic trends, and even the weather can impact the markets. Don’t let market fluctuations upset you, but try and understand why they happen.