We all know that investment is the best way to ensure financial security. Where there are plenty of investment options available, nothing is as rewarding as investing in the stock market. You can unlock huge profit potential by judicially investing in stocks. It’s true that stock market investment involves risks, and that is where knowledge in stock market investment comes handy.
Since the introduction of digitisation at the onset of the millennium, the number of both investors and participating companies in the stock market has seen a steady growth, which makes it an exciting playing field. However, stock market investment is far from a gamble. It demands a systematic and informed approach to earn money from share investment. This article will discuss how to invest money in share market so that you receive a good return.
Before we discuss how to invest, let’s understand first what a stock market is.
A stock market is a place where companies sell partial ownership of their firms to general investors. For example, if a company issues 100 shares and you purchase one share, you gain 1 percent ownership in the company.
A broad categorisation of the stock market divides it into the primary and secondary market. The primary market is the place where the companies launch initial public offerings for the first time as a step to get listed in the bourses. In the primary market, you can buy shares directly from the company.
The secondary market is where buyers and sellers gather to trade company shares, governed by the rules of demand and supply. Investors and traders are critical players in the secondary market.
Stock market indices follow the performance of stocks of the top companies, based on trading volume and frequencies. It works like a cursor determining the general trend of the market – upward or downward.
Why do companies issue shares?
Companies need capital for functioning; so time to time, they raise funds. A company can raise money in a couple of ways – one is to ask existing investors to pump more funds. Secondly, they can receive a loan, but it increases interest payment, which is a liability. Instead, the company decides to launch shares in the market. Investors buy these shares intending to invest in the company’s growth and earn from dividend payment, which is a method of sharing profit among shareholders.
How to Invest in the Stock Market?
Stock market is a money-earning platform for those who have the right knowledge to tap the movement of stocks and gain lucrative returns. If you wish to learn the working of stock market, and how to invest in it, then here are a few tips to follow:
Identify your Investment Requirements:
Before placing the order on the stock market, investors must determine their needs and limitations. While determining the requirements, users must consider present as well as the future needs. The same rule is applicable while determining their limitations. Investors must list their incomes and deduct all their expenses along with debt obligations (if any) to find the investible surplus. An important factor that will determine the share market investment strategy is the risk aversion of the investors. Individuals who do not wish to take higher risks would prefer investing in fixed deposits and bonds. Many investors fail to consider their tax liabilities while investing.
Determine the Investment Strategy:
After understanding the personal investment capacity, investors must analyse the stock market scenario to frame an appropriate investment strategy. Individuals must identify stocks that suit their needs. For example, if an investor wants an additional source of income, investing in dividend paying stocks is appropriate. For investors who want to grow their capital, choosing growth stocks is an accurate strategy.
Enter at the Right Time:
Entering the market at the right time is one of the most important share market basics often overlooked by investors. The general rule of thumb suggests that one must enter the market when it is low.
Purchasing the identified stocks at the lowest price level will maximise the potential profits investors can earn. On the other hand, exiting the stock when it is trading at the highest price is profitable.
Planning the right entry and exit is the fundamental of share market investment. Without a strong plan in place, you will be like a ship without a compass in the sea. Since the stock market is highly risky, you need to exercise caution beforehand to avoid a disaster.
Planning entry is based on fundamental and technical analysis. There is no right or wrong which analysis method you select but be careful of what you infer from the result. While selecting a stock, you mustn’t only concentrate on individual stock performance, instead look for cues from general economic performance and macro-economic factors, which might impact 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.
Execute the Trade:
Traders can execute their orders either through offline or online share trading. They can place their orders on the telephone. If an investor chooses the offline method, he must ensure the broker has understood the order correctly to prevent any errors.
Monitor the Portfolio:
Many investors make the mistake of investing and not periodically checking their investment portfolio. The stock exchange is dynamic and conditions are constantly changing. Tracking your investments regularly is important to exit and entry at the right time. Researching about the companies where traders have an interest is crucial to prevent, or at least minimize, losses in case of any extreme situation. However, this does not mean making decisions with every price rise or fall because patience is a vital characteristic for traders to profit through stock investing.
Things you need before you invest in stock market
Let’s look at what you need before investing in the share market.
PAN card: To start investing, you must have a PAN card with you.
Demat Account: Demat account stands for a dematerialised account, which holds all your investment in digitised format. Since the introduction of Demat, issuing physical shares has become a thing of the past.
The modern investing platform has made the process of creating Demat account quick and simple. You can open a Demat account with a depository participant (DP) or a bank, as most of them offer Demat service to customers. When you are opening a Demat, you will have to pay certain charges and fees before you start investing.
Trading account: A trading account helps with buying and selling of securities. If you are a trader, you might not need a Demat account if you don’t have delivery of shares, but you’ll need a trading account to carry out trading activities. While selecting a broker for a trading account, choose one who is registered with both BSE and NSE.
Linking bank account: You will need to move funds to buy and sell stocks. Whenever you are buying, your bank account gets debited, and Demat gets credited. The opposite happens when you’re selling.
Investing in the stock market
There are two ways you can invest in the stock market – primary market and the secondary market.
Investing in the primary market involves investing in initial public offerings (IPO).
Investing in IPOs is a way to invest in a company’s future growth. Whether or not to invest in IPOs is a personal choice, but it gives a good opportunity to diversify portfolios. You can choose to apply for an IPO through your bank or broker.
Companies issue IPOs when they list in the exchanges for the first time. IPO allotment happens through a lottery, depending on market response. It takes a week for an IPO to get listed in the bourses. Once the process gets completed, investors can start trading in the shares in the secondary market.
The secondary market is where buying and selling of stocks happens. The rules of demand and supply govern the secondary market, and negotiation happens buyers and sellers to conduct a trade. To participate in the secondary market, you will need a trading account linked to the Demat and bank account.
Factors to keep in mind while investing
Every investor is unique, but there are a few common factors that everyone must keep in mind.
Most investors get stumped by the question of how much to invest in starting? Well, it doesn’t have a one size fits all kind of answer. There is no minimum amount to start investing in stocks, but the size of your investment must depend on your financial goals, income, ability to digest risk, and market condition. Another important factor is the age of an investor. A thirty-year-old investor can take higher risk with his investment (therefore allocate a higher percentage of funds into share investment) than someone who is at the age of fifty. Also, remember that you should invest only the surplus fund.
Another common mistake to avoid is thinking of stock market as a money-making machine. When you start investing in stocks, have a clear view of your goals in mind which will help you navigate through the complex market. Remember that investing is stocks carry inherent risk, and it is important to avoid pitfalls while you are investing. Earning potentially high profit is only possible when you have market knowledge, careful about selecting shares, and adopt a strategy that works.
You can educate yourself on how to invest money in share market by studying the market carefully. It will help you understand share market basics, stock selection methods, and popular trading strategies.
If you are a new investor, avoid leverage, which means borrowing fund from the broker to invest in the market. In the share market, it is a common practice, but it also involves high risk. In case you don’t generate profit from the trade, leverage can prove highly costly. You will end up losing all your investment and will also incur cost on the fund borrowed from the broker.
The stock market investment includes inherent risks, some of which you can’t avoid, but some risks also are stock-specific, which you can evade by excluding such underliers from your portfolio.
Creating a well-diversified portfolio is the best way to beat market volatility, but you need to exercise caution against over-diversification. Your portfolio needs systematic monitoring to adjust it according to market growth.
There are different kinds of stocks traded on the markets. Understanding these various shares before developing the investment strategy to suit personal requirements is recommended.
Stock investments possess challenges, especially if you are new. We suggest that you get clarity over stock market investment so that you don’t get swayed by herd mentality and efficiently set a realistic view. When you are investing in the market, do it with long-term planning. Long term investment has a smoothening effect which will help you override market ups and downs.
Lastly, never leave your investment alone. Many investors make the mistake of not monitoring their investment. But the stock market is dynamic, which means the inherent risk of your portfolio changes regularly. Remember, to scrutinise your investment and news pertaining to the market, which might impact the performance of your investment.
If you are wondering how to invest in stock market in India, it is quite simple. You will invest in a regulated environment monitored by the exchange board of India. And now that you have learned how to approach stock market investment, you can start investing right away.
Things You May Also Like to Know
What is the minimum amount to invest in share?
There is no minimum limit. Your ability to invest is proportionate to your ability to take a risk. It can be a few thousand, or lakhs, or crores.
How much should you invest in stocks first time?
There is no minimum amount. If you are investing for the first time, you can begin with a few thousand.
What stocks are good to buy?
You need to watch out for the stocks that are performing well. Stock performance dependents on
- Performance of the sector
- Overall economic health
- Market news, etc.
Stocks that are showing upward trends should be your target.
When should you buy stocks?
You must buy stocks when their prices are moving upwards. Technical traders use different charts and indicators to understand market movement; when the trends are changing. Based on that analysis, they take their position in the market.
How do you profit from stocks?
Stocks are sold by companies to raise capital from the market. These stocks are traded in the market, and their values go up or down following market trends. When stocks prices of a company are going up, you can earn profit by selling these stocks at a higher price.
Secondly, you can also earn from stocks when companies declare dividends. A dividend is a percentage of the company’s profit that the company distributes among its stakeholders.
How do you withdraw money from stocks?
Once you sell some stocks, the brokers settle them on your behalf. It might take a day or two for the value to reflect in your DEMAT account. You can withdraw it when proceeds from the sale hit your account.
Please note, some brokers may charge some fees to conduct the transaction.
What instruments are traded in the stock markets?
Daily traded financial instruments in the stock market are,
- Mutual Funds
Where do I find stock related information?
There are several top-rated websites which can help. Apart from your broker, these websites are a great source to remain up-to-date with daily market news.
What happens in case my shares are short sold?
Short selling was a widely used concept where a trader sells stocks by borrowing them from another investor and repurchase them before the market closes to return to the original owner. During the buying-selling process, the trader earns profit from the price difference. However, in 2001, SEBI has banned short selling. Now, only institutional investors and Mutual Funds are allowed to short sell.
How can you qualify the market as bull or bear?
Market trends are denoted by bull and bear. A bull market is characterised by rising prices, boosted by growing investors’ confidence. When economic trends are strong, and growth potentials are high, the sentiment is reflected in the stock market too. Investors anticipate growth and therefore, invest with confidence.
The bear market lies on the other side of the spectrum. It is characterised by dampened economic growth and poor industry performance which is reflected in reserve investor sentiment.