The sole purpose of any form of investment is to build a corpus fund that can act as a safety net in difficult times as well as an alternate source of income. Stock markets are quite volatile but with the right tools of stock analysis and correct investment strategies, it becomes easier to navigate the uncertainties and make decent profits through stock market investments. It requires thorough market research among many other factors to manage the risks and to safeguard investors’ interests.
Let us discuss the basic question faced by any investor whether new or seasoned investors ‘how to make money in the stock market’.
What are the modes of earning through the stock market?
The two main modes of making money through stock markets are capital appreciation and dividends. When an investor sells their shares at a profit they are known as capital gains. These gains can be long-term gains or short-term gains depending on their period of holding. Apart from the capital gains, investors can also earn dividends from their investment in shares of various companies.
Both these modes of earnings through stock markets are further subject to levy of income tax based on the prevailing rates of taxation.
Top pointers to consider to make money in the stock market
Earning consistently in stock markets is not an easy task but is not impossible either. Many novice investors lose confidence in stock markets with the slightest tumble. It is important to note that a thorough understanding of the markets along with a few other basic pointers can help every investor make money in the stock market.
Some of such basic pointers are discussed below.
Learn the basics of the stock market
Before starting any form of investment or venture it is important to get all the necessary information about it. The same is true in this case and learning the basics is the first step in making money through stock markets. It is important for the investors to first learn about all the technical terms and the basics of the stock market to ensure that they can safeguard their interests. It will help them to understand the market trends and the price movements in a better fashion and sound investment and trading decisions.
Undertake due diligence of stock (fundamental and technical analysis)
After understanding the markets and their price movements, the other important factor to be considered is the analysis of the stocks. This involves the fundamental and technical analysis of the stock in a detailed manner. The fundamental analysis of the stock helps investors understand its quality and if the stock has good bones to be invested. The technical analysis of the other stock helps the investors understand its price movements and the volume at which it is traded.
Avoid herd mentality
One of the most dangerous perils of investing in the stock market is falling prey to the herd mentality. Stock market falls even with the slightest of points many investors start selling their shares in order to avoid more losses. On the other hand, if the prices of a particular stock are on an increasing trend many investors start buying it with the hope to earn profits in the short term or long term. While falling prey to the herd mentality, most investors tend to forget that the risk-return profile for every investor or trader is different, so is their investment goals and time frame. This ultimately may lead to losses rather than a chance to earn profits. Hence, it is important to avoid herd mentality and undertake one’s own research and analysis regarding any stock.
Understand personal risk-return profile
This is an extension of the perils of herd mentality. As explained above, blindly copying or following some other investor’s portfolio and their investment choices can lead to drastic losses as the risk-return expectations vary from investor to investor. It is, therefore, important for the investors to first understand their personal risk-return profile and then choose their stocks for trading or investing accordingly.
Using stop loss to limit exposure
Stop-loss is a very important feature that helps traders limit their losses. It is a price selected by the trader at which the trade is automatically executed once such price level is reached. This tool comes in very handy in the case of volatile stocks where the potential of loss is quite high. New traders should be aware of the meaning and usage of stop loss and use it often to avoid heavy losses.
Avoid short sell in initial days
Short selling is the technique of making money in the stock market even when the stock prices are falling. In a typical buy order, the trader buys a trade at a particular price and then sells it at a higher price to gain profits. In a short sell order, the trader places a sell order first and then buys it at a lower price. The difference in the prices is the profit of the trader. While short selling is a good opportunity for making money in a falling market, novice investors and traders should be cautious of the risks as the potential for loss is tremendous especially in a volatile market.
Maximize the advantage of compounding
Most dynamic investment options rely on the principle of compounding to maximize investors’ wealth. Investment in stock markets is also based on the principle of compounding where the investment portfolio is maximized over the long term. The key to this is investing early and regularly to maximize the benefit of compounding and to ensure that the investors meet their investment goals within the target investment horizon.
The benefit of compounding increases the overall portfolio returns in the long term. However, with consistent additions to the portfolio, there is only little that can be done to meet the target goals. Hence, it is important to invest regularly and in a disciplined manner to ensure that the returns are inflation-adjusted as well.
Diversify the portfolio
An important aspect of trading and investing is diversifying or spreading the risk. This will help the investors and traders to adjust their risk profile and to ensure that they get the benefit of returns from different assets and securities.
Take professional help if required
Investing and trading require a thorough understanding and knowledge of the stock markets and various concepts like fundamental and technical analysis of the stocks, stop loss, trailing stop loss, limit orders (LO), intraday trading, cover order (CO), etc. This may not be easy for some investors or traders and therefore they can take the help of professionals whenever needed and thus safeguard their interest.
Avoid timing the market
It is a fact that trying to time the market is futile as the market almost never reacts in the predicted manner. There is always an element of uncertainty that can take the markets in an unpredicted direction. Hence, rather than trying to time the market, it is always better to rely on the fundamentals and the price volume movements to safeguard the portfolio and make profits at the same time.
Additional points to remember
Some other considerations that can also help the investors in making money are,
- Avoid over-diversification of the portfolio
- Keep track of all the latest news and developments in the target sectors.
- Avoid trading in huge lot sizes or in derivatives in the initial days
- Do not invest in penny stocks just because they are cheap. Instead, look for quality stocks that have strong fundamentals and a good business model.
- Do not be emotionally attached to an asset or stock.
There are many trade gurus and investor help guides available for the investors to help them make money in the stock markets. However, personal experience is the best way to learn and unlearn the technicalities and the nitty-gritty of stock markets. This will help the investors and traders chart out their own pathway to a profitable portfolio eventually and help them maximize their wealth in the long term.
Yes, having a Demat account with a registered broker is one of the primary requirements of stock investment and trading.
The personal risk profile of every investor or trader is different based on which they can select their target sector or stocks along with their investment horizon. Hence, it is important to determine the personal risk profile before investing or trading in stock markets.
Diversification is one of the most important keys to having a healthy portfolio. Traders and investors should avoid putting all their funds in a single stock or sector as it drastically increases the potential of loss. Diversification allows them to balance their portfolio and spread the risk while gaining advantage from multiple sectors.
Stock markets are highly volatile and hence, investing or trading with the core finances may lead to the draining of all life savings in an unfortunate turn of events. Hence it is important to trade or invest only surplus funds at least in the initial days till the time investors or traders gain enough confidence in their abilities to understand and navigate market volatility.