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Stock market investment strategies for long-term success

September 5, 2024

This article has been written by Tisha Bhagwandas Agarwal pursuing a Remote freelancing and profile building program from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Introduction

The stock market is the place where shares of listed companies are traded. The stock exchange is a secondary market and not a primary market. Whenever any company wants to be listed in the stock market, it first has to get approval from SEBI (Securities Exchange Board of India). Whenever any company is listed for the first time, it is called an IPO (initial public offer). An IPO means that a private company sells shares of its own company to the public to raise equity capital. When a private company successfully gets listed on the stock exchange and its shares start being traded, it is declared a public company instead of a private company. There are two parties in the stock market: one buyer and the other seller. The buyer is an individual who buys shares at a low price and the seller is an individual who sells previously purchased shares at a high price. Whenever any individual investor invests in any company and sees future growth, that individual investor buys a percentage (%) of shares of that company and gets that much ownership. Brokers also play a role in the stock market because whenever a new person wants to invest in shares, the first thing he should do is open a demat account and choose the right broker. Brokers are those who act as intermediaries between buyers and sellers. Examples of brokers are: Zerodha, Angel One, Upstocks, Motilal Oswal, etc. Different brokers have different charges; hence, it is important to choose the right broker after doing full research. SEBI’s objectives are to protect the interests of investors, promote fair practices and the development of the stock exchange, prohibit illegal or unfair trade practices, regulate stock market activities. Another important thing is that not all countries have the same stock exchange. Many people do not know this, but for the person who wants to make his career in the stock market or who has interest in going deeper into the stock market, it is very important for him to know that different countries have different stock exchanges. For example, there is a ‘National Stock Exchange’ in India, ‘London Stock Exchange’ in the United Kingdom, ‘New York Stock Exchange’ in the United States, ‘Japan Stock Exchange’ in Japan, ‘Shanghai Stock Exchange’ in China, etc. Also, everyone has different timing.

Understanding long-term investment

Let’s understand what a long-term investment is. A long-term investment is one where the risk level is low and the investment remains safe. But sometimes people also make losses because they did not do proper research before investing. The person who has a high level of patience can earn profits from long-term investments. This is because sometimes a person invests for the long term, but when the price drops, they get worried, thinking, “My investment is long-term, but if the price goes down further in the future, my capital will also be lost. It’s better to sell now at a loss.” And after 3 years, when the price goes up, they regret it, thinking, “If I had been patient, I would have been in profit today.” Therefore, it is very important to have patience if you are a long-term investor. But yes, sometimes it happens that, due to patience, even the capital gets exhausted. That is why doing proper research is very important before investing. There are many ways to make long-term investments, like PPF (Public Provident Fund), mutual funds, stocks, bonds, gold, equity funds, real estate, etc. A long-term investment is one that you hold for more than 3 years and it is good for those who do not want to take much risk. For example, someone who is new to the stock market, who is employed, and who wants to invest a small portion of his salary in future returns. If someone is thinking about making a long-term investment in a company, they should check the company’s fundamentals before investing. If the company’s business is likely to grow in the future, then invest in it; otherwise, avoid it. Many people think that just because a company has a big name, they invest their money in it without thinking, influenced by others, believing it will give them a great return in the future. But this is foolish. It’s not necessarily true that a big-name company that has given good returns in the past will continue to do so in the future. Therefore, it is very important to stay updated on which sectors will grow in the future. Proper analysis, research, and attention to indicators and other tools are essential before investing. After doing all this, you’ll only be profitable in the future.

Key strategies for long-term success in stock market investments

Research and analysis

Fundamental analysis

Fundamental analysis means that whenever a person invests for the long term, he should do fundamental analysis. means you need to look at the stock you are thinking of investing in. You need to analyse a few things, like the growth of the industry, the growth of the company, its balance sheets, the goals of the company and how it will perform in the future. You can see all this in your fundamental analysis. This is best only for long-term investors.

Technical analysis

Technical analysis is for those who do short-term trading, like intraday trading and swing trading. For these things, technical is more important than fundamental. Since you are going to invest in the short term, it is all about focussing on the recent news, charts, and volumes, and only then can you make better decisions.

Portfolio diversification

Asset allocation strategies

Asset allocation strategy is very important. Whenever an individual invests, he invests in different asset classes like equity, debt, gold, etc. to reduce his risk and returns. From the looks of his portfolio, his portfolio is avoiding seeing bad losses.

Sector diversification

Sector diversification means you are investing your capital in multiple stocks. Multiple stocks do not mean that you just increase the stock numbers by investing in stocks in one sector in your portfolio. Because if you do this, you will incur more loss than profit. Therefore, to avoid big losses, diversify your portfolio into different sectors, which will reduce your chances of loss and keep you in profit.

Dividend investing

Importance of dividends

Whenever a company distributes a small portion of its profit among its shareholders, it is called a dividend. It is of great importance that if you take an entry in any stock and hold it for a long time, you get regular income as a dividend. The distribution of dividends depends on the financial health or management of the company. The valuation of shares of companies providing regular dividends is usually slightly higher because it indicates the profit and stability of the company. Tax rates on dividends are somewhat lower than taxes on capital gains, which means investors can also get tax benefits in the future.

Selecting dividend-paying stocks

It is important to keep a few things in mind while selecting dividend-paying stocks. Such as dividend payout ratio, dividend yield, dividend history, growth and debt levels, management and governance, etc. If investment is done after a good analysis, then investors can get capital appreciation along with regular income from dividend-paying stocks.

Long-term holding

Patience and discipline

It is very difficult to have patience, but in reality, it is very important if you want to achieve anything. So if you are thinking of investing in any stocks, then take a long-term view. To remember this, you will learn to have great patience, and only then will you get better returns. If you don’t have patience, you will never be able to achieve your goals and targets, or you will always regret and incur losses. Therefore, whenever you choose to hold any stock for the long term, make sure that your patience level is high to make better returns.

Benefits of compounding

Compounding has many benefits. But the most important benefit is time. Because you can earn more by increasing your investment. This helps with future retirement and goals. Plus, by reinvesting dividends, you get more returns in the future, which also increases your wealth over time.

Managing risk in long-term investment

Staying informed and updated

If you are a long-term investor and you have invested in some stocks, then you forget about them for 3–4 years and remain busy with your work. So listen, never make this mistake. Because it is very important to keep yourself updated with recent financial reports, news, market trends and all that. To keep yourself updated, you can subscribe to any reputable financial news source so that you will get daily financial news, industry reports, market trends and all other updates. And this will help you a lot in making your long-term investment decisions about which sector is growing in the market now and how it will do in the future. This way, you will be able to make better decisions, plus you can also manage investment risk.

Always keep a stop-loss

Whenever you invest in any stocks, it is very important that you set a stop loss. Many people do not set stop losses due to overconfidence, and due to this, they sometimes see huge losses to the extent that their capital is also wasted. Then, after making all these losses, they give up and get tied up in the stock market by investing. Therefore, never invest if you have overconfidence because you will see more losses than profits. Therefore, before investing in your stock, you should set your mind as to what percentage of loss you can afford. It may be 10-15% or how much. By applying stop-loss, you will save your capital; hence, managing risk is very important.

Keep a fixed target

It is very important to set a fixed target. So that your chances of making a loss are around 5% and your chances of making a profit are around 95%. Because whenever you invest in any stock, you should always set a fixed target from the beginning. Because sometimes what happens is that as much as we have set a target, the price goes above that, so we think that we are not going to sell it yet; we have given more measures to it, and we are waiting. But the biggest mistake is that you take too much risk with your invested capital and then the price goes straight below the limit instead of taking it. Whatever profit you had in your stock is gone, and your capital is also gone. Therefore, it is very important to set a fixed target and follow it strictly to reduce the risk level.

Common mistakes to avoid in long-term investing

Emotional trading

Emotional trading is a big mistake and should be strictly avoided. This means that the person trades because of his own emotions and overconfidence. Without looking at any chart patterns. The individual investor does not act logically but acts based on his own emotions, which causes mostly loss. Therefore, it is important to avoid emotional trading.

Avoid random advice and scams

Nowadays, many people give vague advice about the stock market through social media, which is totally false. The only way to avoid scams is to not trust the advice of any random person. Secondly, do not ever be greedy because these people will offer you that this is our special investment scheme, which will double your money and they will also try to manipulate you. If someone tells you the same, do not give any money to him and do not trust him. The main targets of the scammers are middle-class families and people who are greedy. They convince and manipulate them so they invest their money in their schemes and also tell them that they will handle your accounts. Henceforth, be aware of such scammers and think twice before investing your money in such fraud schemes.

Conclusion

Therefore, a person who invests with full research and analysis, manages risk, and has a good level of patience can make a profit from it. The stock market is for those who want to take risks, not for those who don’t want to take risks.

Stock market investment strategies for long-term success

Introduction

Understanding long-term investment

Key strategies for long-term success in stock market investments