Most of us would like to believe that we know how the stock market works. The truth is, even seasoned traders would be hesitant to admit that they don’t know everything. But the one thing everyone is sure about, is the fact that you can make money from stock markets, if you know what you are doing.
What is the stock market?
Also known as equities, stocks give you an ownership interest in a public company. If you own a majority of the shares in a company, you can control how it operates.
A stock market is where publicly listed companies’ shares are traded. Companies float shares to the general public in an initial public offering (IPO) to raise capital. A stock exchange enables brokers to trade company stocks and other securities. Stocks can be bought or sold only if it is listed on an exchange. India’s premier stock exchanges are the Bombay Stock Exchange and National Stock Exchange.
Generally, investments in mutual funds are considered to be less risky than investing in the stock market.
Trader vs Investor:
An investor is someone who is there for the long term. They hold on to their stock for several months or years. A trader buys stocks and sells within a few hours or days, even minutes, in several cases.
When you begin investing in the stock market, you need to be clear about the kind of investor you want to be. Why? Because the strategies for being a trader are entirely different from that of being an investor. Choose what you want to be and start your investing journey.
Understand the stock market basics:
Getting your fundamentals strong in the stock market is paramount. Learn about the different types of shares, how companies list their shares, what stock exchanges are out there, what is SEBI, Nifty, and Sensex, how the market works, and so on.
To be a successful investor, you must learn the stock market basics. It will help your investing strategy once you have a trading account.
Buy the right investment:
Granted, this point is easier said than done. You can quickly check the past performance of a stock, but being able to predict its future performance can prove to be a tough task. To be successful in the stock market, you need to spend a lot of work analyzing the company.
When analyzing a company, you need to look at the basics: earnings per share (EPS), return on equity, interest coverage ratio, debt-to-equity ratio, price-to-book value, operating profit margin, and more. It doesn’t stop there. You also have to study its balance sheet and income statement, future plans, and competitive advantages and even understand the mindset of the management team. Putting blind faith in the stock’s previous performance is always a risk.
Start with a small amount:
Start investing with a smaller amount. Invest small amounts in different shares instead of putting all your money in a single entity. You can always fall back on the others if a particular stock falls. When you start, let your goal be to get a deeper understanding of how the stock market works.
Always keep in mind that you should protect your capital. There are two things that a beginner investor should keep in mind:
- How much loss can you salvage per trade? Once you have reached that point in the stock, quickly exit.
- Do not invest all your capital in a single move, no matter how lucrative a stock looks.
You’re in for a risky bet if you aim to get a 40% profit yearly. Keep realistic goals to be successful. Knowing that losses can be bad is the first step toward being realistic. Aim for anything from up to 25%. Do not fall for advertisements that promise you the moon. If anything looks too good, it’s best to avoid it. In the stock market, it’s always best to stick to the basics.
Diversify your portfolio:
Diversification reduces your risk profile. Imagine having one stock in your portfolio, and you lay all your hopes on it. Due to circumstances beyond your control, the stock keeps plunging downhill. Your entire investment goes kaput. That’s a situation no investor wants. You want your hard-earned money to multiply, not become zero.
We are not only referring to different stocks when we use the word diversification. Spread your investments across asset classes such as bonds, property, commodities, derivatives, real estate, etc.
Be clear about your risk profile:
One of the most important things to do for success in the stock market is to have clarity on your investment goals and risk profile. Your investments could be for a secure future after retirement, for your children’s education, or to simply grow your money. Once there is clarity on this, you need to decide the time by which you want to achieve this goal. Knowing this will steer your investing strategy in the right direction.
Choose stocks of established companies:
Companies that have been there for decades enjoy customer goodwill, have a solid product line, and beat their sales projections YOY, are great stocks to pick. You can rarely go wrong when you choose the stocks of established companies. Your returns might not be high in the short term, but you can bet on them for the long term. You can easily find the data of companies that regularly give dividends and bonuses. Seasoned investors place their long-term bets on such companies.
Have a simple strategy:
It is easy to go overboard with investment strategising. Everywhere you look, there are promises of high returns. There are testimonials from people like you to back up the claims of the brokerage firms. The Fear of Missing Out (FOMO) is high. Keeping a steady and calm head can give you financial stability at this juncture.
Do you want high returns without having to go through the rigmarole of hours of research? Place your bets on the top 100 or 200 companies.
Be prepared for losses:
Having the stomach for losses is an essential trait that investors should develop. You will have losses from time to time. Some might be from stocks you thought would be your biggest profit-maker. Fret not; it might only be a temporary loss. Do not sell the stock in a panic. Take a deep breath and let the storm calm.
When you have a diversified portfolio, a single stock underperforming severely shouldn’t worry you much. To be receptive to long-term high returns, you should be able to wait out the short-term volatility.
Try a stock market simulator:
The only way to understand stock market investing without risk is by using a stock market simulator. Put your virtual money on stocks. See how the market behaves, the fluctuations of the stocks, and the reasons behind it. It would also give you an idea of how you take the changes in the stock market daily.
Stay away from rumors:
People are obsessed with money, and the same would reflect among stock market investors. There would be a lot of brouhaha about nothing. Someone will tell you that a particular stock will be the next big thing. Do not fall for it. Be sceptical when your friends or family talk about stock market trends.
Every investment should be based on solid research and understanding of the company. Do not succumb to emotional investment decisions. When a sudden stock market crash occurs, many investors panic and immediately sell off all their stocks. No long-term investor would behave like this.
Know the sectors that you want to invest in:
Which sector will help you meet your investment goals with minimum fuss? Do not get pulled in by the market perception of the performance of certain sectors. Keep tracking the macroeconomic indicators and the strength of the stock before making a decision. Please note that the largest company in an industry might not be the one giving you the best returns. Therefore, you need to analyze a sector, study the different companies within it, and find good stocks based on your research.
Be careful about leverage:
Borrowing funds from your broker to execute your stock market trade is referred to as leverage, and it is a common practice. Even though it helps you make potentially bigger trades, it also comes with many risks. Only invest what you can afford to lose.
Low-priced stocks aren’t always profitable:
There is a wrongly-held perception that low-priced or penny stocks are profitable. There is a reason why the price is low. A small-cap stock doesn’t change into a mid-cap or a large-cap stock without a significant change in the underlying fundamentals. Penny stocks of companies that show poor performance will result in losses.
Invest for the long term:
Investing should be a long-term activity. You need to be patient and be in it for the long term. For that, you need to manage your emotions effectively. Do not be too thrilled when you see a slight upward tick, nor be heartbroken when you see a big loss. If you have a sound investment strategy based on logic and reasoning, you will surely make bank.
Select a trusted stockbroker:
The last tip we want to share is to open a Demat account with a trusted stockbroker. You can invest in various stock market options using a single Demat account. They come with a free trading account, stock market tools, research reports, brokerage cashback, and other value-added services. Ensure that the stockbroker you choose offers responsive customer care to resolve your issues quickly.
Stock marketing investing is not as complicated as it looks, but it isn’t easy either. The secret lies in how you do your research while not giving in to temptation. Remember that the market is highly volatile, and the stock prices can fluctuate unpredictably.
For every seller in the market, there is a buyer who believes that they will profit too. If you keep this in mind, you will stay grounded, and your investment strategy will be built on fundamentals and sound logic.