How to invest smartly in stocks when the stock market is soaring
Many investors with a high risk appetite love to invest in direct stocks. The Indian stock market is currently trading near all-time highs, but some investors are unsure whether to stay invested or withdraw from their current equity investments. They fear that if the market drops from this level, they will end up losing their wealth. At the same time, they don’t want to give up any possible gains if the market continues to hit new highs in the coming days.
So what should they do? What should their equity investment strategy be when the stock market is at its highest? I have discussed some useful pointers in this regard.
Consider investing in dividend paying stocks
Stocks can give you a return on your investment in two ways: through capital gains or dividend income through which companies share their profits with shareholders. If the company you invest in is cash rich, generates regular income, and has low debt, it will likely pay dividends. Typically, companies that consistently offer high dividend yields are less prone to market volatility. So even if the stock market is trading at an all time high, you may want to consider choosing stocks that have strong fundamentals, a great history of dividend payouts, and the potential to deliver dividends consistently going forward.
However, before investing in shares of dividend paying companies, it is also essential to understand the tax implications. Dividend income is taxable on the investor side. Thus, if you receive dividend income, you must pay tax on that income at your applicable tax rate.
Getting in and out of equity investments in a short period of time to make more money is generally considered speculation. The main difference between investing and speculating is that the former focuses on analyzing and managing risk to achieve the expected rate of return, but the latter is not research-based – rather it depends on “odds.” to earn income. When the market peaks, you need to be prepared with all kinds of strategies to mitigate the associated risks. Investing after careful research can help you avoid unnecessary risk and reduce the risk of loss.
Follow a strict stop-loss on short-term investments
As the name suggests, âstop-lossâ is the threshold level predefined by the investor beyond which the investment position is exited to reduce further losses. For example, suppose you have invested in 100 shares of “XYZ” at Rs 1000 per share. The price of “XYZ” shares begins to decline after a few days. When it reaches Rs.900, you decide to set the stop-loss at Rs.850. This means that you will wait for it to drop to Rs.850 to exit the investment position. The next day the action opened lower at Rs.840 triggering your stop-loss and you invested in “XYZ” at Rs.840 reserving a loss of (Rs.1 lakh – Rs.84,000) Rs. 16,000. But later the price of “XYZ” fell to Rs.600. As you had no position in XYZ shares, you avoided a larger loss, thanks to your stop-loss.
As such, it is crucial to strictly follow your stop-loss when investing in stocks. This can help minimize your losses. When your stock price goes up, you need to simultaneously move the stop-loss up or by a preset percentage of the stock price to make sure you can lock in the gains. The process of gradually shifting stop-losses in sync with the movement of the stock price is called trailing stop-loss.
Diversify your investments among fundamentally strong stocks
Choosing fundamentally strong stocks has several advantages, including a faster recovery after a fall in the stock market. So, when selecting stocks for your portfolio, focus on fundamentally strong stocks with a solid track record, little or no book debt, good cash levels, high income growth, attractive profitability and a plan. promising growth. You should aim to adequately diversify your investments in different sectors and in stocks of other companies in order to minimize risk. Having excessive exposure to just one sector and a few companies can increase your risk if that particular sector or the stock underperforms.
Avoid investing too much and use SIP mode if you are a beginner
You need to assess your risk appetite before investing any money in the stock market. Always invest as much as you can afford to lose. The stock market is very volatile, you should only invest if the daily highs and lows do not impact your daily finances. If you are able to do a stock market analysis, direct investing in the stock market can be very rewarding in the long run, provided you understand the risks as well. It is crucial to avoid overinvestment, that is, investing beyond your risk appetite and financial capacity. Overinvestment in stocks can lead to heavy losses if market conditions turn unfavorable. For beginners, systematic investment plan (SIP) investments in blue chip equity mutual funds may be a better option for achieving good long-term returns.
(The author is CEO, BankBazaar.com)