Are you looking to invest in financial markets to put your money to effective use? Well, there is every reason why you should do that. When you have an opportunity to put your money to work even when you are asleep, why miss out on it?
Financial markets can certainly be game-changing for you and help you grow your finances at a much faster pace than bank deposits. However, whenever we talk about financial markets, no knowledge or half knowledge can be quite dangerous. Simply put, financial marketplaces can be quite disastrous for those who do not have sufficient knowledge to trade in these markets.
So, the question is, as a beginner with no or little knowledge of financial markets, should you still take the risk? Well, we will say that you should certainly go for it but with caution. Before you begin to explore financial markets, it is imperative that you gain effective knowledge and insights into how stocks and trading actually work. Otherwise, rather than earning more from your hard-earned money, you might end up losing it if caught unaware.
However, we certainly wish to make you feel discouraged about the idea of exploring financial markets. All we are saying is that you should carry out some knowledge-based research before you step into the world of stocks and trading.
Having said that, in this blog, we shed light on some of the basics that you need to know before you start investing and trading in financial markets. So, let us get started without further ado.
What You Need to Know About Financial Markets
Effective knowledge of personal finances
When we talk about knowledge of financial markets, a good hold of personal finances will act as a perfect foundation for it. The effectiveness of your financial management will directly depend on how good you are at personal finances.
To explain, knowledge of personal finances is inclusive of the following
- Retirement Planning
As you can figure out, most of the elements of personal finances will give you a great sense of direction when you embark on the journey of exploring financial markets. When you are effective at budgeting and investments, you can understand trading better and set effective goals.
Similarly, if you have your retirement a few years later, retirement planning will help you understand what kind of investments will be best suited for you. All in all, stepping into the financial marketplace without knowledge of personal finances can be a blunder. On the contrary, exploring the market with a great hold of personal finances will certainly put you at an advantage.
In fact, it is notable that a large number of youngsters lack even the most basic knowledge of personal finances and financial management. This is one of the major reasons that most youngsters don’t understand financial markets well or are not very confident about investing in financial markets. If you are a youngster, most probably you can relate to this fear or hesitation. However, the logic is quite simple, the more you know the less you will fear.
Knowledge of the financial risks involved
The fact of the matter is that financial markets are not always a happy place to be in. Parallel to the possibilities of making big gains in the financial markets, the risks involved are also big. Let us try and understand this through an example.
We all have been witnesses to the massive buzz around cryptocurrencies. But you would also be aware of the ongoing huge slump in the global crypto market. Did you know that as per TechCrunch, in the second quarter of 2022 alone, crypto losses amounted to $670 million leaving investors high and dry?
Having said that, it makes complete sense that you should be well aware of the risks involved in the financial marketplaces. Knowing the risks will help you differentiate better between low-risk investments versus high-risk investments. For instance, equity funds are known to be relatively high-risk as compared to debt funds.
To explain, equity funds can be more volatile given the fact that these funds invest your money in equity shares and linked securities. On the other hand, through debt funds, you invest your money in government securities and other similar instruments like debentures. Even though equity funds are more promising in terms of return on investment, the volatility is high too.
Basically, when you understand the market risks, you know the intricacies of the risks associated with all types of funds in a more worthwhile way. The same will facilitate better decision-making with respect to investments and trading.
The bottom line is that it is as important to know the risks involved as it is to acknowledge the opportunities. Different types of funds or investment instruments like IPO, stocks, and so on have their own share of financial vulnerabilities which you must know before you put your hard-earned money into the financial market with the objective of amplifying it.
Short-term vs long-term mutual funds
Are you planning to invest in mutual funds for promising returns? So, would you be investing in short-term mutual funds or long-term funds? For how much time do you want your funds to be parked in the mutual funds’ marketplace?
These questions may seem overwhelming at first and also slightly confusing. But trust us when we say that it is important for you to know the answers. To delineate, it is important for you to know how short-term mutual funds compare with long-term mutual funds. This will give you complete clarity in terms of the kind of mutual funds you want to invest in for more fruitful financial growth.
To explain the difference, long-term mutual funds are more appropriate for people who are willing to take the risk of putting their money into equities. Eventually, the longer you park your funds for the better the chances of higher returns.
On the flip side, short-term mutual funds are more suitable for investors who do not want to risk much in the name of greater returns. Having said that, while building your investment portfolio, it is better that subject to your willingness to risk, you know which mutual funds match your requirements.
When you have great clarity on the same, it will further lead to more meticulous investment decisions. After all, when it comes to investing your money to make it grow, there should be no room for confusion.
Tax exemption eligibility
We did mention taxes as a component of personal finances. Now it is time to elaborate on the same. Frankly speaking, taxes on our hard-earned money certainly hurt us to the core. This is why tax-saving is a popular buzzword in the financial market. In fact, those who are seasoned investors always look to put more of their money in funds, the capital gains from which are exempted from taxation obligations.
Therefore, it is vital that you understand which funds or stocks will give you tax benefits and which will not. This is going to be a crucial aspect of your investment portfolio. You certainly should look to invest in stocks or funds that come with tax waivers. In this way, you can optimize your finances better as the tax obligations can be too overwhelming at times.
The ideal time to invest
Is there ever an ideal time to invest in the financial marketplace? Does the timing of your investments matter? Well, the answer is a big yes! There is an opportune time to invest in the financial markets and you should know what that implies.
Let us explain the same in simple terms for a more lucid understanding. When there is a slump in the stock market, it is a more favorable time to invest as you will get more units in the same amount when there is a fall in the market.
For instance, let’s say the average price of a company’s share is USD 100. When the market has an upward trajectory, the same share will trade at a much higher price than the average price. That may not be the ideal time to buy that stock. On the contrary, when there is a slump in the market, you will get the same stock at less than a hundred dollars. This is one of the notions or theories about trading shares.
Alternatively, another theory is that when a stock’s price is shooting up and is expected to further rise in the near future, that can also be seen as an ideal time to invest. Besides, speaking of the best time of the day to buy stocks, Forbes suggests that the time when financial markets open in the morning is one of the best times to invest.
In fact, you should always keep a keen eye on stock tips to benefit from financial markets to the fullest. All in all, you need a thorough understanding and knowledge of the same to determine the best time for investing or buying stocks.
Moving ahead, the subsequent section highlights some additional tips for beginners looking to venture into financial markets.
Additional tips to consider
- Do your research: In the financial market, rumours or intuitions do not work. You may be axing your own foot if you are looking to thrive in the financial market entirely on the basis of your instincts. You need to ensure that you do your bit of research before you start. Thanks to the internet, there are a plethora of articles, videos and apps that you can use to facilitate your research. In fact, there is a great chance that you will also find ample resource on a specific stock or fund you are looking to invest in.
- Set investment goals: You will have a better chance of making your finances flourish when you set attainable goals. Investing in a financial marketplace is no gamble. You need to set clear investment goals when you put your hard-earned money in the market. Goals have to be specific, measurable and knowledge oriented.
- Understand the trends well: Do not buy a stock or invest in a fund purely on the basis of its popularity. You also need to look at the trends. To explain, you need to analyze how that fund has done in the past few weeks and what the projections suggest. If you are investing in the financial market through an app or a website, you will find these trends or charts easily. Remember, just because a stock or fund belongs to an eminent fund, it does not necessarily mean that it will make a great investment decision.
- Invest through a credible partner: For investing in the financial marketplace, you will need an intermediary. This intermediary can be an investment app, a website or a bank. What you need to ensure is that you are only investing through a trusted partner that has enough credibility.
- In the initial phase avoid high-risk funds: While you are still learning about the financial market as you invest, you should avoid highly volatile funds in the initial steps of your journey. Once you begin to understand things better and gain more confidence through low-risk investments, you can then set goals for venturing high-risk funds. It is always a great idea to begin with caution.
To encapsulate, the financial markets are for everyone and can literally change fortunes. Irrespective of whether you are investing ten dollars or a thousand dollars, the only thing needed is effective knowledge of how financial markets work. As long as you have that knowledge, you should definitely back yourself to gain big from these markets. From effective goal setting to setting targets for profit margins, knowledge of financial markets will be your greatest asset. With this asset, you can further optimize your financial assets.