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Wednesday, April 21, 2021

Why new stock investors must now proceed with extra caution

New investors who have entered the stock market after March 2020 have seen mostly a bullish trend. However, economic indicators are still very sluggish and the markets will correct themselves at some point, which will trigger a trend reversal.

Written by Adhil Shetty |
Updated: January 15, 2021 5:28:10 pm
Image source: Pixabay

A massive influx of funds by new investors was reported in the Indian stock market in 2020. According to the Securities and Exchange Board of India, nearly 6.3 million new demat accounts were opened in the nine months leading to December. Most of the country was confined to its home during the pandemic-necessitated lockdowns last year, and many took this as an opportunity to take stock of their finances and decided to invest in direct equities to earn high returns.

The stock market crashed in March 2020 when the social restrictions were announced but since then it has comfortably regained the lost territory and scaled new peaks. Therefore, new investors who have entered the stock market after March 2020 have seen mostly a bullish trend. However, economic indicators are still very sluggish and the markets will correct themselves at some point, which will trigger a trend reversal. So if you are one of the new stock investors drawn for a quick buck, you must proceed with extra caution. In the past several instances, the stock market has retreated after new highs, and then it took several months to recover. So, what precautions should you take as a direct stock investor in the present situation when the Sensex is trading close to its all-time high of 50,000? Let’s find out.

Stay ready with strategies to look after your investments when the market cracks

Investors without strategies to deal with market falls will likely make losses. You must know how to strike a balance between greed and fear when you invest in the stock market. Some investors start panicking when there is a steep downward correction. In fear, they sell at losses.

As the market has reached all-time highs, you should focus on your current risk-taking capacity and adjust your stock portfolio accordingly. If you are not able to take a higher risk, you should book profits and strengthen your liquidity position. You can keep some funds liquid so that you can use them for reinvestments in the stock market when there is a correction. At this point, you should also avoid volatile stocks and focus only on fundamentally strong shares that can withstand steep corrections.

Diversify your investments

When you invest money in different asset classes or in different schemes or sectors within the same asset class, it can help you in reducing the volatility risk to a great extent. For example, suppose you invest your entire money in banking sector shares. Whenever the banking sector falls, it’ll bring down the value of your portfolio. Therefore, you may want to diversify your investment across different sectors, for example, pharma, steel, banking, construction, IT, etc. to mitigate sectoral volatility risk. When the market is making new highs, you may also shift a portion of your total exposure to other asset classes like debt funds or FDs to lower the overall risk.

Don’t invest over your capacity

You must avoid leveraging against your financial capacity to invest in the stock market. Borrowing to invest in the stock market may put you at high risk of loss. If the market falls, you may lose the entire borrowed fund and later left with the obligation to repay the EMIs.

Invest systematically

A systematic investment like an SIP can be a good idea when the market is making new highs. You can invest a fixed amount in a portfolio of selected stocks and buy them every month on a fixed date, irrespective of market trends. When investing systematically, you need to compose your portfolio with care. Do your research and focus on shares that are expected to perform well in the long-term. Review your portfolio from time to time and replace the non-performing stocks in your portfolio with better stocks whenever you feel it’s essential.

Set strict stop-losses

Don’t get emotionally attached to a stock while investing in it. Before investing, you must set the stop-loss for each scrip and if the stop-loss is triggered, exit them immediately. Similarly, when your stock performs well and you expect that it can do even better, you could put a trailing stop-loss as the stock makes new highs to ensure that you earn a specific level of profit when the trend reverses all of a sudden.

Final thoughts

The biggest test of a stock investor’s convictions is a falling market. It’s important to stay alert, well informed, and take the right step when the markets turn red. Money doesn’t come easy, so plan well to handle the worst situation while investing in the stock market.

 

The author is the CEO at BankBazaar.com. Views expressed are that of the author.

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