Every investor who deals in stocks dreams of making huge money, irrespective of whether they are a newbie or an expert. To make money in stocks, you need to have a solid strategy worked out so that you can protect your money while making investments that give good returns. A strong understanding of the stock market is essential, along with the factors that govern it if you wish to make money.
Many people have the query “How to earn 1 lakh per month from share market?” Before we answer that, let us go through the basics quickly. Firstly, let’s understand what a sharemarket is. A sharemarket is an online market where people buy the shares or stocks of a company. In the sharemarket dictionary, the words stocks, equities and cash mean the same thing. A company’s shares/stocks refer to the shares of that specific company that fluctuates every day (variations ranging from Rs 10 to 500).
What happens when you buy shares?
When you purchase a stock of a company, you are linked to that company’s business. If and when that company makes a profit, then the prices of its stocks will go up, and you gain more money than the amount you invested.
- You can start from one share and buy any number of shares depending on your budget
- You need to keep money in your DEMAT account to be able to buy and hold shares.
- You make a profit when you get a higher price for selling the shares than the amount you invested buying them.
If, on the other hand, the company’s profit goes down, or it makes a loss or is associated with unfair activities, then the share prices may fall, and you might lose a portion of the money you invested.
What is a DEMAT account?
When you trade, you need to hold them somewhere. This is when a DEMAT account comes into the picture. A DEMAT account holds shares and securities that are in an electronic format. DEMAT stands for “dematerialised account.” Traders open a DEMAT account when they buy shares or dematerialise them. Dematerialisation is the process of turning physical share certificates into electronic form. You do not need to provide cumbersome documentation for the shares anymore. This makes it easier to maintain, track and access them from anywhere you feel like. If you wish to trade online, you will need to open a DEMAT account with the assistance of a Depository Participant (DP). It is also easier to keep track of and trade in them, especially now when trading of shares is done online.
- A DEMAT account can be opened in any bank or share broking firm.
- Your ordinary savings account or bank account cannot be used in trading of shares.
Different types of trading in the stock market
Intraday Trading- You buy stocks in some quantity, for example, 100 stocks, and sell them off in the same day. You buy and then you sell. The investment you make is not permanent, nor is the blockage of money. If the price of the stocks fall after you have bought them, you make a loss. If you sell them for more, you make a profit before the day ends. Whatever happens in the span of a day.
- You can earn anything from Rs. 100 to Rs. 10,000 or even Rs 20,000 in a day with intraday trading. But this depends on your risk appetite.
- The losses you make can also be of the same amount
- If you are facing loss, and have money in your bank, then you can choose to convert the trade to delivery mode.
Delivery Trading- Suppose you buy a quantity of stock, say 100 Axis Bank stocks. You can choose to sell them the next day itself, or after 30 days, a year or even after 20 years. You need to invest and you need money. Delivery trading is when you buy shares and hold them for a certain interval of time. Once you buy them, they will be reflected in your demat account, where you can keep them for as long as you want.
- You must treat the long time delivery mode as an investment.
- A return that is 2 times to 40 times the original amount is possible in a span of 2 years.
- This type of trading is more secure, and the average tendency is for the return to be good.
- If the investment is bad, you can face a loss as steep as 90%
Swing Trading- in swing trading, you try to make gains in stock in a span of a few days or weeks. You buy a stock today at some price, and wait for its price to go up. After a few weeks or few months (going up to 6-8 months), you sell it when the prices are high.
- If the price goes low after your purchase, you make a loss.
- If you sell it at a higher price, you stand to make good profit ranging from 10% to 100%.
- The profit you make depends on the stocks.
- If you are facing a loss, you can hold it.
- you can risk facing a loss of 30% to 70%
Option & Future Trading- If you are trading in options, you have the right, but are not obligated to trade shares at a specified price whenever you please, for the time that the contract is in effect. A futures contract will require you to buy or sell a share on a specified date in the future unless your position is closed before that date. So, a future is an obligation to buy or sell an underlying stock at a time that is predetermined, while an option is the right to buy or sell a stock without any obligations. If you are a beginner in the share market business, it is best you hold off dealing in options and trading until you have gathered enough experience.
Why do people sell stocks when the price falls?
To book profit from shares that have already been bought
To help prevent further loss people sell stocks for loss booking, if they have purchased the stock at a higher price, and the prices start dropping. While there is always the option to sit tight and hold the stocks and wait for the prices to rise, if the stock prices continue to drop further, the loss will just be greater
Traders primarily sell off stocks out of the fear of losing more, in an effort to save their money
How much money you can earn in stock market?
This question is too generalised to have a satisfactory answer. How much money you can make depends mainly on the amount you are investing in. You will get a margin of 10 to 15 times from a majority of the trading systems. If you buy a stock and hold it from 3 months to 3 years, you can get a return of 30% to 5 times.
As we have understood by now, the price of a stock wavers every day. Depending on the stock, prices can vary from 10 paisa to Rs 1000. So, your skill lies in identifying the lowest price and buying the share then in delivery trading, and selling it when the prices rise. The waiting period can vary from a few days to a year, but your returns will also be higher. This is the most common type of trade most traders indulge in.
How to make money from the stock market
Here are some general guidelines which will help you stay in track:
Discipline is the key- Take the time to develop your own systematic approach. Having patience and investing systematically in shares you find promising is prudent. The stock market is volatile, and no matter how you plan things out, risks will always be there. So, you should always take calculated risks, and plan on the necessary action against underlying stocks, like hedging. Being patient and disciplined will help you see the larger picture, and take decisions based on that.
Do your research- Nobody gets lucky at trading stocks; they need to put in the hard work. If you do not do your research about a company before buying their stocks. It is best to put aside some time before you invest, as that increases your chances of making a good investment. It is wiser to understand a business and its future prospects, instead of just looking at the price of its stocks. Investing in a business you understand will give better results.
Work on broadening your portfolio- You should slowly build your portfolio by diversifying across various classes of assets. By doing this, you can optimize your returns with minimal risk. The type of diversification and levels you choose depend totally on you, and always vary from one investor to the other. It can keep the volatility of the market in check.
Try not to blindly follow trends- Any decision you take to buy or sell a stock should be solely yours. Such decisions should not depend on the opinions of relatives or friends, no matter how well-meaning they sound. Your decisions should also not be swayed by what people known to you are doing, or what the trend seems to be. Rely on your own instincts.
Rigorous monitoring is necessary- If you want to invest in the stock market, and become better at it, you need to regularly track the news and follow the events of the companies you are interested in. Events have an impact on stock prices at times. Following them closely gives you an advantage by making the trends more predictable to you. Sometimes you need to be able to form causal links between events and the impact this can have on shares of a particular company. Similarly, good profit can also impact the stock prices positively.
Have realistic expectations- Your expectations should always have their feet planted firmly in reality. The equity market tends to deliver its returns in sudden bursts. It will always test the patience of every investor time and again. Logically speaking, there is no asset class which can give very large returns continually. Nature is governed by the reversion of means. Unrealistic expectations lead to incorrect assumptions, which cause a lot of grief in the form of bad decisions.
One consistent rule is that the stock market regularly offers entry and exit points to all traders. You should never invest all of your cash in the trade. Always reserve some for later. Corrections allow you to invest in a stock at a lowered price, which can then give you hefty returns after a trend reversal.
Invest only surplus funds- Another wise rule of thumb is to invest only the surplus funds. This includes money you do not need in the immediate future. Since the share market fluctuates frequently, you always stand a risk of facing loss temporarily. The movements of the stock market trends are cyclic in nature. You need expertise in the domain to understand the changes in trends.
Things you should focus on
- Your entry point in the share market
- When to sell the stocks and exit the market
- How to safeguard the capital you invested
- How to get out when a trade is going the wrong way
- Every trader incurs losses in the trade. The trick is to know when to sell the stocks, depending on the loss you can bear.
If you make your investments timely, you need not worry about the price of the stock, which will rise in your favour. What is essential is being able to identify when the stock price hits bottom, or is close to it. Then you can invest in the stocks at that point, after which the prices will go up again, at which point, you can sell them off.
This is the basic rule that governs the entire share market - buy when the prices are low, and sell when they are high. It may sound simple enough, but this is also the most difficult to follow, simply because it is extremely difficult to pinpoint the exact bottom. So, knowing when to buy and sell is crucial, and you should work on it.
The tips and tricks mentioned above can be the necessary guidelines you follow when you start making investments in stocks. We know the movement of the market can be random and confusing at times, making it very difficult to follow any strategy. But, if you invest in quality stocks, they always payback in the long run.
You should always know when to make an exit. The money you save today by making a timely exit is equivalent to money earned. If you feel the terrain getting too uneven, there is no shame in exiting.