The Five Rules of Investing in Equities

Introduction

Luck could play a role in investment, however minor. However, it was recognised from the beginning that an understanding of the trade and adhering to rules and regulations have a primary role in the success or failure of an investment. The Code of Hammurabi, written close to 1700 BCE, is the first recorded instance of guidelines provided to investors. Since then, investment guidelines and rules have kept evolving, keeping pace with the growth and evolution of the market. In the early 1800s, the Methodists introduced guidelines for ethical investment, urging the community to not invest in ventures that profit at the expense of their neighbours. This practice has evolved into modern-day ethical investing.

Additional read: How to start equity investment

The Five Rules of Equity Investments

Investing in equity shares requires a thorough understanding of one’s financial priorities, financial instruments and market conditions. It also calls for a carefully planned approach. Often called the golden rules, following these mitigates the chances of loss from equity fund investments. These rules are as follows:

• Avoiding herd behaviour is the first of the five rules. Herd behaviour is the tendency of new investors to follow the trading pattern of others due to peer pressure, insecurity in one’s own pattern or for some other reason. In order to overcome this tendency, one must conduct thorough research of the stocks, sectors they belong to, and market conditions surrounding them. One must also understand the dynamics of investing in equity shares. Finally, one must be confident in one’s approach.
• Long-term planning is the second of the five rules. While making short-term profits is certainly possible through investments in equity shares, the search for such profit often leads to high risk and rash decisions, and could end in the making of severe financial losses. A long-term approach towards equity market investments prevents the possibility of such rash decisions. A careful investment for a number of years in a stable stock is more likely to lead to financial stability and prosperity, rather than quick trades that depend upon fickle sentiments.
• Avoiding investing in stocks based on speculation is another rule. New investors often look for shortcuts and turn to speculation. This is often a dangerous mistake as investors expose themselves to a high risk of loss. Careful planning and thorough investigation of the fundamentals of the company is very necessary to mitigate risk and lead to better investments.
• The fourth rule is diversification. Diversification is the spreading of investments across multiple stocks in multiple sectors in order to minimise the potential loss from any single company’s stock and also to mitigate market risk. This is an important strategy of risk mitigation, generally followed by experienced and seasoned investors. Diversification allows for better long-term returns and the creation of minimal risk portfolios. It also allows for hedging against market fluctuations.
• Most investors have a limited budget for investing. Thus, it is important that they follow the plan they have created after researching and getting to know the rules and strategies of making investments in equity. Without a proper plan, investors would be left stumbling in the complexities of the trade, resulting in failed investments and financial losses.

Also Read: Taxation on Equity Investments

Conclusion

These five rules provide investors with reliable guidelines to make stable and safe investments that could eventually lead to fulfilment of their financial goals and provide them with long-term financial stability.