New to the stock market? Follow these 8 principles to create ​​​wealth in the long term

Equities are like celebrities on a reality show. You can love them or hate, but you can’t ignore them. Tales of great riches derived from equity investing are common and can lure investors into the fold of equity investing. At the same time, there are many horror stories about people who were thrown into poverty because of all the losses they made in the equity market. If you have heard more of these stories, it is likely you would never really go anywhere close to equity investing.

Unfortunately, neither of these two scenarios are accurate. Equities are neither a ‘get rich quick scheme’ nor are they weapons of destruction. Instead, they are instruments of long-term wealth creation. However, if you are a first-time investor, then there are a few imperatives that you must follow in order to have a positive investing experience and truly benefit from equity investing.

Make friends with the strongest in the market
Midcap and smallcap stocks can be often very volatile because there is greater uncertainty in their earnings and growth trajectory. Further, in order to identify the really good midcaps, you need to do a great deal of research. Instead, new investors can first get acquainted with largecaps. These stocks are industry leaders and have already demonstrated steady growth and earnings. While the returns from such stocks might not be very high, they are relatively more stable than mid-and-smallcaps.

Make friends with everyone on the playground
Always seek to diversify your portfolio instead of just sticking to a few stocks or investments. The main advantage of diversification is that in the case of sharp movements in any one sector or industry, your overall losses will be reduced. For example, when markets are rallying certain sectors like banking and infrastructure tend to do well. On the other hand, when markets are volatile or falling, certain defensive sectors like pharmaceuticals or FMCG tend to perform better.

Don’t get married to a stock
We all make mistakes when investing in stocks. If you have invested in a stock that has seen a sharp price drop and continues to fall, then it is better to cut your losses and sell the stock. You don’t need to hold on to the stock like it is your best friend.

Do not court trouble
Equity markets are considered risky simply because, in the short-term, prices react to investor sentiment and a host of external factors. In such an environment it is important for you to stick to your investment strategy and not get carried away with the current fads or hot tips. You will only end up courting trouble and adding to your risk.

Never go all in
The first rule of stock market investing is that you should never deploy your entire capital in one go. It is best to invest some amount of money on a periodic basis. This has two advantages. First, in case of a sharp and prolonged market downfall, you will not lose all your capital in one shot and second, you can keep buying stocks at all levels.

Never play blind
Before you start investing, familiarise yourself with the leading stocks, businesses, and sectors in the market. Understand the factors that can impact stock prices and then read about those factors. For example, understand how interest rates can impact the economy and the stock markets. Then, read research reports that tell you how interest rates can move in the near future and stocks and sectors that will be impacted by this move.

Always have a plan
When it comes to equity investing, you always need to have plan in place. While most people focus on when to buy a stock, it is equally important to focus on when to sell a stock. Adequate research and set parameters can tell you when to buy a stock. Similarly, you should also be able to identify when stocks are overvalued and accordingly sell your positions. The most important strategy to follow, whether you are investing for the short-term or the long-term is to have a stop loss. If you hit your stop loss, it is time to exit the stock.

Start with passive
If the idea of doing research and stock picking is too much for you, then you can start with passive investing. This entails investing in ETFs or index funds. Such funds invest in all the constituents of the benchmark index and in the same proportion. As a result, the returns generated from these funds are similar to market returns.

Equities can help you create long-term wealth and achieve many of your financial goals. However, the way you approach equities will determine whether they generate wealth for you or lead to losses. Your chances of the former are fairly high if you follow the above 8 imperatives.

(Anu Jain is Head (Broking), IIFL Wealth Management. Views are her own)