Investing is a process that is often deferred by the majority of new investors. Some blame the high valuations in the market, or some try to wait for the perfect opportunity to get into the market. But at the end of the day, some investors are always ahead of the crowd by following some key principles. Earning decent returns from the stock markets requires certain stock trading skills, the ability to perform technical and fundamental analysis, and also some basic knowledge related to the financial markets. Therefore, prior to entering the stock markets it is better to gain knowledge and then put your hard-earned to work hard for you.
Some of the basic Tips and Tricks to get better returns
Before we get into the tips, you should remember the stock market is not a casino where you gamble with money. Rather, you will only make money if you follow certain rules and stick around for the long term.
Following are 5 tips that can be useful for all the stock market participants to achieve better returns from their capital.
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Identify your Trading technique
There are multiple ways in which you can deploy your money in the stock markets, hence it is important to identify the types of investments you want to make. It is always important to divide your capital into a separate investment capital and trading capital. If you are a passive investor, you should focus only on investing in good companies and not indulging in trading activities. On the other hand, if you are a trader, it is necessary to not use more than 50% of your total corpus for trading. By this, you will ensure not to blow up your entire capital in the case of unexpected events.
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Diversify and follow proper asset allocation
Diversification simply means dividing your entire portfolio into small parts and then deploying them in numerous assets. These could be equity (Small cap, Midcap, Large-cap stocks), debt, gold, government securities, etc. Also, remember to follow the (100 minus Age) rule where you can subtract your age from 100 and allocate the percentage of your portfolio into equity. For example, if you are 30 years old, in that case, you should allocate (100-30 = 70) 70% of your portfolio in equities according to your risk appetite and allocate the rest in debt instruments. Though it is not a rule, it is just a guideline to protect you from excessive exposure towards ‘equity’ which is the most volatile asset class by nature.
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Hedge your portfolio using derivatives
Derivatives are great tools that can reduce your overall risk in the markets. By selling a Call Option or Buying a Put Option in a particular asset, you can extract additional profits in case the price of the asset falls. By applying such strategies, you can earn additional returns on your long-term investments without actually selling them.
Derivatives are also beneficial in scenarios where your stock neither goes up or down. Hence, you can employ derivatives and earn returns in upward, downward, and even sideways markets. One of the primary focuses of investors should be to preserve their capital and not to chase maximum returns. By protecting your capital, you will automatically make sure to get a good return on your money.
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Invest consistently and smartly
SIPs (Systematic Investment Plans) are a great way to invest with discipline but a more effective way to achieve some additional returns is by using smart SIPs. In a smart SIP, you let your regular SIPs run but whenever there is a substation correction in the markets, say 5-8%, deploy some additional capital and buy the dip. Buying the dips will catapult your overall return percentage as you are allotted more units in a falling market as compared to a traditional market.
Also, remember it is not a good idea to wait for a good day to start your investing journey. In stock markets, there is a saying, ‘The best day to begin investing was yesterday, and the second-best day to invest is today.’ Therefore don’t try to time the market and miss out on potential gains. Rather rupee cost average your investments and get a good average return on your money.
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Have predefined financial goals for your investments
Investing without a goal will always lead to panic selling or FOMO (fear of missing out) buying. To prevent this, it is critical to map your investments with a specific time frame and goal. These goals can range from purchasing a house, car, foreign trip, retirement planning, etc.
This will not only encourage you to invest regularly but also to track your investments regularly to make sure you are on the right track. You should also remember to set realistic targets and aim for the instruments with the most adequate risks as per your appetite.
Bottom line
Stock markets are definitely risky, however, if you follow the necessary principles and establish a clear financial goal for your investments, you will earn great returns in the long run. In order to achieve it, it is necessary to gain sufficient knowledge, discipline, and provide time for your investments.
Stock markets might be volatile in the short term, but if you zoom out and look at the broader picture, ‘Time in the markets always beats timing the market.’
Remember these tips and try to keep it simple, and you will automatically enjoy your wealth creation journey.
