Let’s accept, many of us don’t have the heart to manage our investment. The idea is quite scary, and we want to avoid the trouble it takes – following market performance, comparing charts, and more. But, let’s remind ourselves that no other asset class has the potential to generate returns like stock investment in the long-run. However, if we follow data, most individual investors don’t perform well in the stock market. Statistics show that individual investors generate 5 percent less return on an average as against the market index. So much so, a financial advisor would advise you to invest in index traded funds. Then, why are we suggesting that you become an individual investor? It is for the reason that index funds have their set of shortcomings.
Firstly, index funds offer you investment options in limited stocks, following the strict selection rules. As a result, several stocks aren’t available for investing under index funds. And secondly, you have no control over where your money gets invested. But most importantly, it’s the return. Investors who implement a consistent investment strategy usually end up earning better returns than most index funds.
If you avoid the common mistakes made by individual investors, you can earn more from your investment in stocks. In this article, we are going to discuss how to be an individual investor.
It’s The Right Time To Become Individual Investor
If you want to become an individual investor, the best time is now. The advent of technology has made it easier for individual investors to get all the information they need. Earlier, it was a bit of a challenge as high-speed internet was a distant future, and real-time data was just a concept.
Secondly, the trend is shifting. The market has evolved, and so are the asset management companies. These changes are subtle but long-lasting, and these are the changes that are also modifying individual investor behaviour.
Let’s now see how you can ace in the role of an individual investor.
Knowing what you are getting into is the key to set your expectations right. Most people have a negative feeling about share investment. But investing in shares means owning a fraction of the company. And, when you do so, you share the same risk and reward as the promoters. When the company is growing, you will reap all the benefits in the form of dividends, but you also risk losing money when the company performance suffers. But fortunately, there are ways to lower the risk and improve your return from stock investment.
Setting Your Expectations Right
The share market is governed by the idea of risk and reward, and the two are directly related. The higher the risk, the higher is the chance of a return, and the opposite. There is no such thing as a risk-free investment. So, if you want a higher return, you have to take a higher risk.
Nowadays, investors will be happy to receive a 7-8 percent return on their investment. This mightn’t sound like a great return, but in the long-run, if you reinvest consistently, you will see your investment growing to a respectable level.
If you want a higher return and your investment to grow fast, invest in emerging sectors with the potential to grow in the evolving market.
Understanding Risk Appetite
as we have said before, the return is associated with risk. If you are ready to take a higher risk, you will receive a higher return. But the question is, how much money you are prepared to risk. There are several tools available online that will help to determine your risk profile as an investor. Most of these tools depend on your input to calculate the result. It will ask you simple questions regarding your income, financial goals, liabilities, and more. Once your risk profile is known, you can select your investment path to achieve your financial goal.
The industry recognises different risk-taker categories. You can be a high-risk investor, moderate-risk investor, or low-risk investor. Typically, high-risk investors prefer investing in high-risk stocks. They like the idea of betting against the market and winning big. Their portfolio contains small-cap company stocks and shares in the emerging sectors. The low-risk investors prefer steady earning on their investment and mostly invest in blue-chip company stocks. However, most investors are moderate risk-takers who prefer a better balance of risk and return. Their portfolio contains a good mix of both high-risk and low-risk stocks from different sectors.
Building Trading Strategy
We have already mentioned above that you would need an investment strategy to become an individual investor.
When it comes to building a strategy, logic, knowledge, and fundamental analysis go a long way. Picking the right stocks in no less than science, and anybody who told you that they just got lucky with share market investment is probably lying.
Instinctive decisions may work in some cases, but to sustain in the long-run, you need to learn the art of picking the right stocks.
If you are continually buying overvalued stocks, you are putting pressure on your investment and return. But in the share market, it is tough to decide when a stock is overpriced, fairly priced, or underpriced. To overcome the challenge, acquaint yourself with finance basics like balance sheet, ratio analysis, price-to-earning, and dividend yields.
Avoid Day Trading
Most people enter the stock market to get rich quickly and start trading immediately. But if you want to become an individual investor, avoid this rookie mistake.
Mind it that we aren’t saying that day trading is bad. But it’s altogether a different game. Average investors must avoid day trading because it is a simple way to lose money fast in the stock market.
Day trading requires more knowledge, experience, and a faster finger on the trigger. It is about reactiveness because opportunities vanish as soon as they occur. Moreover, it is also a highly competitive domain. On the other hand, long-term investing has several advantages, including implementing strategy, paying lesser tax, and the opportunity to build wealth with reinvesting.
The Bottom Line
Becoming an individual investor doesn’t mean you have to become a finance expert. If you are careful to avoid rookie mistakes, pick the right stocks, and diversify your portfolio, you can generate a healthy return from investing in the share market. Diversification helps in minimising risks and optimising returns in different market conditions.
As soon as you grow confident with investing and decided your investor’s profile, you can start as an individual investor. Find a good broker and begin your financial journey today!