Top 5 Rules of Equity Investment

Rule 1: Do not give into the Pressure of Collective Behaviour

During the initial phases of your investment journey, you’ll find that there may be a tendency to give into the pressure of trading in the same manner that most other investors are. For instance, you may have an inclination to buy the stocks that are popular in the market, or to sell stocks that other investors may be selling off. Termed as the herd mentality, this could prove to be harmful to your trading prospects.

To overcome the temptation to follow the crowd, conduct your own research and read up extensively about investing in equity. Get to know the rules of equity investment and consult a financial advisor if you require more clarity about how to invest your money in the financial markets.

Rule 2: Think Long-Term

Another one of the most essential rules of equity investment is to think long-term. Many investors focus extensively on making quick profits in the stock market. The downside to this strategy is that it can often propel you to make rash and reckless decisions that may be grossly uninformed, all in the hope of turning profits in record time. Needless to say, this could eat into your capital and leave you with significant losses.

A better approach would be to invest for the long-term. Shift your focus to making profits over the course of 5 to 10 years. This improves the chances of your equity investment delivering higher returns. Furthermore, it also reduces the possibility of making uninformed decisions driven by fear or bias.

Rule 3: Refrain from Speculating

First-time investors also tend to give into speculations and tip-offs. Buying a share or selling one based entirely only speculation alone can expose your investments to a high degree of risk. And more often than not, that could be a risk your investments are incapable of bearing. Speculation-based tips about the right time to buy a stock or the right time to exit are not based on research and facts, and therefore, are highly likely to be mere guesses.

Instead, conduct your own research and observe the stock market to formulate your trading strategy. Seek investment tips and advice from seasoned financial experts, and keep yourself updated with the socioeconomic climate in order to read the markets better. These strategies are grounded in information and solid investigation, and are therefore more reliable.

Rule 4: Diversify, Diversify, Diversify

This is easily one of the most common investment tips offered to investors with varying levels of expertise. And yet, it’s often the most difficult rule to follow. This is because if a particular asset class performs well the first time you invest in it, you may find yourself relying on that investment greatly. It could also discourage you from exploring other, often more lucrative, investment options.

Despite how convenient it may seem to continue to invest only in stocks that may have delivered profits for you in the past, it’s vital that you diversify your investment portfolio. This spreads your risk across different investments and therefore, it also improves your returns in the long run. You can use your demat account and your trading account to invest in a variety of financial assets such as futures, options, and forex, among others.

Rule 5: Make a Plan and Stick to it

Investing in equity without having a plan to follow is not a prudent way to go about this financial exercise. Discipline is key. So, if you’re a first-time investor or if you’re looking for some investment tips to streamline your strategy, it’s best to start with a plan that focuses on your short-term and long-term financial goals. Aligning your investment strategy to your financial targets can help you invest in a disciplined manner.

Your investment budget is another area you may need to exercise caution in. Focus on investing a specific amount each month, instead of infusing capital each time you wish to purchase a new stock. This way, you can balance your portfolio with other low-risk investments, without exceeding your budget.

Conclusion

By following these rules of equity investment, you’ll find that your chances of earning higher returns may improve greatly. It may seem tough to adhere to your strategy when you begin investing in equity. However, remember that with time, it gets easier to play by the rules and exercise control. The smartest thing to do is focus on your long-term goals, so your trading and investment pattern is in line with achieving those targets.