Why is knowledge essential before starting on your equity investment journey

Your regular discussion with your friends and colleagues turns to the stock market and the fortunes many people have made from it. You may have never invested, and you do not have any experience of it. But, hearing their stories, you decide to jump in and invest in the stock market. You think you can double or triple your investment too. But wait!

Contrary to popular belief, the stock market is not all about the play of luck. It requires good knowledge and understanding of the market and how it functions.

Never jump blindly into stock markets

The stock market can earn significant returns, but you can also lose all your money if you invest blindly without knowing the nitty-gritty of the market.

There is a famous saying – "don’t dive in deep water if you don’t know swimming basics”. This saying holds even in the stock market. Refrain from investing your money if you do not understand the elementary concepts.

Knowing the field will help you make intelligent decisions, which will benefit you in the long run. Therefore, it is crucial to invest only after acquiring the basic knowledge of the stock market.

Educate yourself before investing

When you purchase a stock, you own a stake in the company. Therefore, before you make your first investment move, it is wise to know the company you wish to invest in detail. Get an understanding of the company, its business, plans, customer base, competition, etc.

Here are some key areas which you need to be familiar with before you begin your equity investment journey.

• Understand the basics of equity investment, stock market compliances, stock indices, etc.
• Learn the market terminologies such as diversification, volatility, liquidity, stop loss, limit order, and margin money, among others.
• Understand the financial ratios like price-earnings ratio (PE), earnings per share (EPS), return on equity (ROE), market cap and so on.
• Learn the commonly used methods of stock selection, such as fundamental analysis and technical analysis.
• Before investing in a particular stock, it is wise to assess the company's financials, competency of promoters, growth prospects of the company, compliance to corporate governance, etc.
• Focus on understanding the relationship of your stock with the broader economy and identify the factors that drive your stock. You may benefit from learning the market relationship with the leading economic indicators like inflation, interest rates, rupee value against the dollar, GDP, fiscal deficit., etc.

You must be wondering as to how and where do you acquire this knowledge? So let us get to that.

Where do you acquire the knowledge from?

The ICICIdirect Knowledge Center can be your source for acquiring investment knowledge and understanding basic terms. You may also go through the videos and blogs on the Knowledge Center or enrol for one of the courses.

One of the essential sources for gathering information about a particular company is quarterly financial information. It is readily available in public domain and also with most of the good Brokers in an organized format. You can review the company's balance sheet, profit and loss statement, and cash flow statement to assess the company's financial position. That will give you an idea of its sources of funds and how it handles its cash, revenue and expenses.

You can also stay updated about company news from business magazines, newspapers, or financial news websites.

Quick tips for planning your equity investment journey

The very first step towards your investment journey is to make a personal financial roadmap. You need to define your financial goal and evaluate your risk tolerance. Few more things to keep in mind specially while investing in stocks are:

• Choose a stock carefully after doing adequate research
• Review the performance of your stocks periodically
• Keep a tab on the company news as that can significantly impact the price of your stock
• Diversification is the key to successful investing, so put your money in stocks of different companies and sectors 
• Consider rebalancing your portfolio occasionally

Knowledge will make your investment journey smoother and successful. So, learn the basics of the stock market before you dive into it. To trade or invest in the stock market, you need to have a trading and demat account. You may consider opening these accounts with any renowned broker.

Conclusion:

Learning is an ongoing journey. All good brokers have experts who regularly analyse economy, company, various asset classes, etc. and recommend investments. While you need not have a similar expertise, it helps to acquire knowledge to understand, appreciate and implement investment strategies suggested by experts. It also helps you become more responsible towards your investments and financial goals.