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Safe Stocks To Invest In For Beginners – Stock investments are one of the best ways to build wealth. A strategic investment plan and data-driven decisions can help any investor achieve their long-term financial goals using stocks.
All investments involve some degree of risk. The investment world operates on the simple principle of risk-reward: higher risk offers a better opportunity to achieve higher returns, and vice versa.
Safe Stocks To Invest In For Beginners
Therefore, equity investments involve certain risks that all investors should be aware of. Today I’m going to talk about the risks associated with investing in the stock market and how you can manage those risks effectively.
How To Invest In The Stock Market
To manage stock market risk, you need to know what risks you have to deal with.
First, as an investment option, stock investing is risky. Although it can reduce the risks, it will not be as safe as a bank term deposit.
Despite this, equity investments have historically outperformed time deposits, gold, etc. investments. If you plan your investments well, this is a great way to make your hard-earned money work as hard as you do to achieve your goals. Here are some risks associated with investing in the stock market:
The price of a share is determined by the demand and supply of that share in the stock market. Therefore, it fluctuates every day and even within days. As an investor, you buy shares and make a profit either through dividends declared by the company or by selling them at a higher price.
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However, if you have to sell the stock when the price is low, there is a chance that you will book a loss. This is market risk.
A share is an ownership stake in a company. If the company faces business problems, the share price may fall. Most investors analyze a company’s financial position and management before investing in its stock. Therefore, the problem there can lead to a price drop.
Since dividends are a good source of regular income for stocks, the solvency or liquidity of the company is crucial. A company with liquidity problems may cut dividends or, worse, struggle to meet its bills or repay its debts. This may have a negative impact on the company’s share price.
I mean the tax laws of the company whose shares you bought. The government is constantly changing the tax rules based on the needs of the economy. If the sector in which you have invested is adversely affected by such tax laws, the share price may fall within a short period of time.
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The government also modifies interest rates on deposits and loans based on the direction of the economy. Therefore, when interest rates rise, companies get loans at higher interest rates, which can reduce their profits and affect share prices.
On the other hand, if interest rates are too low, it indicates a slowdown in the economy and businesses suffer losses. Therefore, a balanced interest system is healthy for equity markets.
Many sectors are governed by regulatory bodies. For example, the pharmaceutical industry, the tobacco industry, telecommunications, etc. Any change made by the regulator can affect the business of all companies in the sectors, causing prices to fall.
Inflation is a general increase in the price of goods and products. As inflation increases, companies must spend more to acquire the same amount of raw materials. A sudden rise in inflation can affect the profitability of companies, causing share prices to fall.
Steps To Building A Profitable Portfolio
There are many other risks like political risk, social risk, exchange rate risk etc. In simpler terms, there are many factors that can affect a stock’s price. Therefore, the answer to the question of whether it is safe to invest in stocks depends on how you manage these risks.
This is the meaty part of the article. I’ll try to keep it simple and offer some actionable tips on how to manage stock market risks and answer the eternal question, is it safe to invest in the stock market?
You may have heard this term many times in almost every investment related article. Remember the saying “don’t put all your eggs in one basket”? If you do and the basket falls, all the eggs may break. The same is true for stock investments. If you invest a significant portion of your money in the stocks of a company in a sector and the sector falls on hard times, you may suffer huge losses.
Diversification is effective when you invest in stocks of companies that have zero or low correlation with each other. In simpler terms, invest in market segments so that if one segment falls, the other doesn’t automatically fall either.
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In addition to diversifying across sectors, be careful not to focus too much on just large-cap, mid-cap, or small-cap stocks. Invest in companies of different sizes to minimize exposure to each segment.
Another good way to reduce the risk of investing in stocks is to make sure that you thoroughly research the company before you buy its shares. Look at the company’s financial position and assess whether it is solid enough to weather the economic ups and downs. Also, fundamentally strong companies tend to be favored by price-driven investors.
Today’s investors have a wealth of information available on news feeds, blogs, online articles, etc. across. Although all the “experts” claim to make huge returns, getting involved in investing without proper research can be counterproductive.
Also, during economic slowdowns or recessions, panic can cause investors to make second-guessing decisions that can lead to losses or further increase the risk of a stock portfolio. That’s why it’s important to ensure you always make data-driven decisions and keep speculation at bay. Remember, stock investing is NOT gambling.
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Equity markets are inherently volatile. Therefore, if you have a stock portfolio, you may need to sell some stocks and buy new ones to optimize your returns. You can identify these opportunities by regularly monitoring your investments.
Once every two weeks is good, but you can increase or decrease the frequency depending on the stocks you have invested in.
Conceptually, defensive stocks belong to companies that sell basic goods and services. Think healthcare, food, etc. Regardless of the state of the economy, people spend on these products/services.
Thus, although they are also affected by market volatility, the share price of such companies is relatively stable. Hence, by ensuring that you allocate a portion of your investable corpus to such stocks, you can reduce the overall risk of your investment portfolio.
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Even if you don’t earn regular income in the form of dividends from your stock investments, companies that offer consistent and high dividends are considered strong companies.
Therefore, unless dividends are cut, such stocks tend to outperform other stocks in the same sector. Therefore, when investing in a particular sector or market segment, make sure you also pick up stocks that pay high dividends.
Now that you have a fair idea of the risks associated with stock investing and how to manage them, I would like to highlight one important point that you should keep in mind while investing – always invest according to your risk tolerance. .
Every investor is different and has a different risk tolerance. While one person is willing to bet on the proverbial dark horse or take a high risk with their investment in order to get a high return, another will settle for lower returns as long as they take lower risk.
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For example, if a person with a low risk tolerance invests in small-cap stocks and the market falls for a few days in a row, they may panic and sell the stocks at a loss. However, an investor with a high risk tolerance will probably hold on to the investment without panicking, or make a selling decision sooner, minimizing his losses.
Regardless of market conditions, instead of asking if it’s safe to invest in stocks right now, think about how you can make investing in stocks safer and maximize your returns.
The stocks mentioned in the article are not recommendations. Please do your own research and due diligence before investing. Investing in the securities market is subject to market risks, please read all related documents carefully before investing. Please read the risk disclosure documents carefully before investing in shares, derivatives, mutual funds and/or other exchange traded instruments. Because investments are subject to market risks and price fluctuation risks, there is no assurance or guarantee that investment objectives will be achieved. NBT does not guarantee a guaranteed return on any investment. The past performance of securities/instruments is not indicative of their future performance.
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