We all know that investment is the best way to ensure financial security. While there are plenty of investment options available, nothing is as rewarding as investing in the stock market. By judiciously investing in stocks, you can unlock the potential for huge profits. It is true that stock market investing involves risk and that is where knowledge of stock market investing comes in handy.
Since the onset of digitization since the turn of the millennium, the stock market has seen a steady increase in the number of investors and participating companies, making it an exciting playing field. However, investing in the stock market is far from gambling. It demands a systematic and informed approach to earn money from share investments. This article will discuss how to invest money in the stock market so that you get good returns.
Before discussing how to invest, let us first understand what the stock market is.
A stock market is a place where companies sell partial ownership of their firm to common investors. For example, if a company issues 100 shares and you buy one share, you will own 1 percent of the company.
A broad classification of the stock market divides it into primary and secondary markets. The primary market is where companies launch their initial public offering for the first time as a step towards listing on the market. In the primary market you can buy shares directly from the company.
The secondary market is where buyers and sellers come together to buy and sell shares of a company, according to the rules of supply and demand. Investors and traders are important players in the secondary market.
Stock market indices follow the performance of stocks of top companies based on trading volume and frequency. It works like a cursor that determines the general trend – up or down – of the market.
Why do companies issue shares?
Companies need working capital; So they collect funds from time to time. A company can raise money in two ways – one is by asking existing investors to raise more funds. Secondly, they can get a loan, but it increases the interest payment, which is a liability. Instead, the company decided to launch shares in the market. Investors buy these shares with the intention of investing in the company’s growth and earn from dividend payments, which are a method of sharing profits among shareholders.
How to invest in stock market?
The stock market is a money-making platform for those who have the right knowledge to tap stock movements and earn attractive returns. If you want to learn how the stock market works and how to invest in it, here are some tips:
Identify your investment needs:
Before placing an order in the stock market, investors should determine their needs and limitations. When determining requirements, users should consider current and future needs. The same rule applies when determining their limits. To find investable surplus, investors must list their income and deduct all their expenses, including debt obligations (if any). An important factor in determining stock market investment strategy is the investor’s risk aversion. Individuals who do not want to take too much risk prefer to invest in fixed deposits and bonds. Many investors fail to consider their tax liabilities while investing.
Determine investment strategy:
After understanding the individual investment potential, investors should analyze the stock market situation to formulate a suitable investment strategy. Individuals should identify stocks according to their needs. For example, if an investor wants an additional source of income, investing in dividend-paying stocks is ideal. Choosing growth stocks is a perfect strategy for investors who want to grow their capital.
Enter at the correct time:
Entering the market at the right time is one of the most important stock market fundamentals that is often overlooked by investors. A general rule of thumb suggests that one should enter when the market is low.
Buying a stock identified at the lowest price level will increase the potential profit that the investor can make. On the other hand, when a stock is trading at a higher price, it is profitable to exit.
Proper entry and exit planning is fundamental to stock market investing. Without a solid plan, you will be like a ship without a compass at sea. Since the stock market is very risky, you need to be careful in advance to avoid disaster.
Planning access is based on fundamental and technical analysis. There is no right or wrong which analysis method you choose but be careful what you draw from the results. While picking stocks, you should not focus solely on individual stock performance, but instead look for clues from general economic performance and macro-economic factors, which may affect share performance. As a rule of thumb, invest in the direction of the trend.
Most successful investors follow four data points, which are P/E ratio, P/B ratio and dividend yield of NIFTY and FII activity to identify the right entry point.
Run the trade:
Traders can execute their orders through offline or online share trading. They can place their order over the telephone. If an investor opts for the offline method, he should ensure that the order is correctly understood by the broker.
View the portfolio:
Many investors make the investment mistake of not checking their investment portfolio periodically. The stock exchange is dynamic and the situation is constantly changing. It is important to regularly track your investments to ensure timely exits and entries. Researching the companies that traders are interested in is crucial to avoid or at least minimize losses in case of any critical situation. However, this does not mean taking decisions with every price rise or fall as patience is an important trait for traders to make a profit through stock investment.
Things to consider before investing in the stock market
Let’s see what you need before investing in the share market.
PAN Card: To start investing, you need to have a PAN card.
Demat Account: A demat account is a demat account in which all your investments are held in digital form. Since the introduction of demat, issuance of physical shares has become a thing of the past.
Modern investment platforms have made the process of creating a demat account quick and easy. You can open a demat account with a Depository Participant (DP) or a bank, as most of them offer demat services to customers. When you open a demat, you have to pay certain charges and fees before you start investing.
Trading Account: A trading account helps in buying and selling of securities. If you are a trader, you may not need a demat account if you don’t have delivery of shares, but you will need a trading account to carry out trading activities. While choosing a broker for a trading account, choose one that is registered with both BSE and NSE.
Linking Bank Account: You need to move funds to buy and sell stocks. When you make a purchase, your bank account is debited and demat is credited. The opposite happens when you sell.
Investing in the stock market
You can invest in the stock market in two ways – primary market and secondary market.
Investing in the primary market involves investing in an Initial Public Offering (IPO).
Investing in an IPO is a way to invest in the future growth of a company. Whether to invest in IPOs is a personal choice, but it offers a good opportunity to diversify a portfolio. You can choose to apply for an IPO through your bank or broker.
Companies issue an IPO when they are listed on an exchange for the first time. IPOs are allocated through a lottery, depending on market response. It takes a week for the IPO to get listed on the stock market. After the process is completed, investors can start trading in the shares in the secondary market.
The secondary market is where stocks are bought and sold. The rules of supply and demand govern the secondary market, and buyers and sellers negotiate to trade. To participate in the secondary market, you will need a trading account linked to a demat and a bank account.
Factors to keep in mind while investing
Every investor is unique, but there are some common factors that everyone should keep in mind.
Most investors are puzzled by the question of how much to invest in the beginning? Well, there is no one size fits all type of answer. There is no minimum amount to start investing in shares, but the size of your investment should depend on your financial goals, income, risk tolerance and market conditions. Another important factor is the age of the investor.
A thirty-year-old investor can take more risk in his investments (hence a higher percentage of funds allocated to stock investments) than a fifty-year-old. Also, remember that you should only invest extra funds.
Another common mistake to avoid is thinking of the stock market as a money-making machine. When you start investing in shares, have a clear vision of your goals that will help you navigate the complex market. Remember that investing has inherent risk and it is important to avoid pitfalls when you are investing. Achieving potentially high profits is only possible if you have market knowledge, are careful in picking stocks and follow a strategy that works.
You can teach yourself how to invest in the stock market by studying the market closely. It will help you understand stock market basics, stock selection methods and popular trading strategies.
If you are a new investor, avoid leverage, i.e. borrowing funds from a broker to invest in the market. In the stock market, this is a common practice, but it also involves high risk. If you are not making a profit from trading, taking advantage can be very expensive. You may lose all your investment and also spend the funds borrowed from the broker.
Investing in the stock market involves inherent risks, some of which you cannot avoid, but some risks are also stock-specific, which you can avoid by excluding such underlyings from your portfolio.
Building a well-diversified portfolio is the best way to beat market volatility, but you need to be careful of over-diversification. Adjusting your portfolio to market growth requires systematic monitoring.
Different types of stocks are bought in the market. It is recommended to understand these various stocks before developing an investment strategy as per individual needs.
Stock investing has its challenges, especially if you’re new. We suggest that you get clarity about stock market investing so that you don’t get influenced by the herd mentality and take a realistic view of efficiency. When you are investing in the market, plan for the long term. A long-term investment smooths the effect which will help you to override the fluctuations of the market.
Finally, never give up on your investment. Many investors make the mistake of not monitoring their investments. But the stock market is dynamic, which means the inherent risk of your portfolio changes regularly. Remember, to scrutinize your investment and market related news, which may affect your investment performance.
If you are wondering how to invest in the stock market in India, it is very simple. You will be investing in a regulated environment overseen by the Exchange Board of India. And now that you’ve learned how to approach stock market investing, you can start investing right away.