How to invest wisely in stocks when the stock market is booming

Many investors with high risk appetite prefer to invest in direct equities. The Indian stock market is currently trading close to its all-time highs, but some investors are not sure whether they should stay invested or exit their current investments in stocks.

They fear that if the market falls from this level, they may lose their assets. Also, they don’t want to miss out on potential gains if the market continues to hit new highs in the coming days.

So, what should they do? What should be their investment strategy in stocks when the stock market is at an all-time high? I have discussed some useful points in this regard.
Consider investing in dividend paying stocks
 
Stocks can give you a return on 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, is generating regular income, and is low on debt, it is likely to pay dividends. Typically, companies that consistently provide high dividend returns are less prone to market volatility. Therefore, even if the stock market is trading at an all-time high, you can consider choosing stocks that have strong fundamentals, excellent dividend payout history and the potential to offer consistent dividends in the future.
However, before investing in shares of dividend paying companies, it is important to understand the tax implications as well. Dividend income is taxable in the hands of investors. Therefore, if you receive dividend income, you will have to pay tax on such income as per your applicable tax slab rate.
avoid speculation
 
Going in and out of stock investments over a short time frame to make more money is generally considered speculative. The main difference between investing and speculating is that the former focuses on analysis and risk management to earn an anticipated rate of return, but the latter does not rely on research – instead it focuses on the ‘probability’ to earn income. depends on. When the market is at its peak, you should be prepared with all kinds of strategies to mitigate the associated risks. Investing after thorough research can help you avoid
Follow strict stop-losses on short-term investments
 
As the name suggests, ‘stop-loss’ is a pre-determined threshold level by the investor, beyond which exits the investment position in order to minimize further losses. For example, suppose you have invested in 100 shares of ‘XYZ’ at the rate of Rs 1,000 per share. The price of ‘XYZ’ shares starts falling after a few days. When it reaches Rs.900, you decide to set the stop-loss at Rs.850.
This means you will wait till it drops to Rs.850 to exit the investment position. The next day, the stock opened at Rs 840 triggering your stop-loss and you invested Rs 840 in ‘XYZ’ and made a loss of Rs 16,000 (Rs 1 lakh – Rs 84,000). But later the price of ‘XYZ’ fell to Rs.600. Since you did not have a position in XYZ stock, you avoided large losses due to your stop-loss.
As such, it is important to strictly follow your stop-loss while investing in stocks. This can help minimize your losses. When the price of your stock rises, you should shift the stop-loss upward or simultaneously according to a predetermined percentage of the stock’s price to ensure that you can lock in the profit. The process of gradually shifting the stop-loss with the movement in the stock price is called trailing stop-loss.
Diversify your investments among fundamentally strong stocks
There are many benefits to choosing fundamentally strong stocks, including a faster recovery after a stock market crash. Therefore, when selecting stocks in your portfolio, focus on fundamentally strong stocks with a solid track record, low or zero debt on the books, good cash-flow levels, high growth in revenue, attractive profitability and a promising growth plan.
You should aim to adequately diversify your investments in different sectors and in stocks of other companies to reduce the risks. Having additional exposure to a single sector and a few companies can increase your risk if that particular sector or stock underperforms.
If you are a beginner then avoid excessive investment and use SIP mode
 
Before investing in the stock market, you should assess your risk appetite. Always invest as much as you can afford to lose. The stock market is highly volatile, you should invest only if the daily fluctuations do not affect your daily finances. If you can analyze the stock market, direct investing in the stock market can be highly rewarding in the long run provided you understand the risks as well.
It is important to avoid over-investing, that is, investing beyond your risk appetite and financial capacity. If the market conditions turn unfavourable, over-investment in stocks can result in huge losses. For beginners, Systematic Investment Plan (SIP) investment in top rated equity mutual funds can be a better option to earn good returns over the long term.

Leave a Comment