More people from all age brackets want to know how to make money in stocks and with good reason. The growing access to information about the share market, ease of trading, access to learning resources, and the possibility of earning high rewards on investments have led to an increasing interest in investing in stocks for the long-term.
What is difference between trading and investing?
Trading is when you buy and sell shares in the short-term to earn quick profits. It involves taking risks at certain points to make profits. On the other hand, investing is buying and holding on to shares over a long period of time, with minimum risks, and to create wealth over years.
You can earn profits by trading in the short-term, too. However, a safer and more consistent way of earning higher returns is by investing in the long-term. In this article, we look at ways to help you earn through investments over-trading.
Where do the profits in the share market come from?
Benjamin Graham, widely regarded as the ‘father of value investing’, summarises how one earns from the share market. He gave the golden quote, “The real money in investing will have to be made—as most of it has been in the past—not out of buying and selling, but out of owning and holding securities, receiving interest and dividends, and benefiting from their long-term increase in value.”
The strategy of ‘buying and holding’ stock is attributed to Graham. The most consistent and accessible way to earn from the share market, this strategy presumes that you have chosen to invest in well-managed, financially stable companies who are shareholder-friendly. If you have made these types of investments, the minimum amount of time you need to hold on to your investments is five years, to get significant returns.
Every consistently successful investor in the share market follows the idea of this economist, investor and professor.
How to earn money from share market?
To get the best out of your investments, follow some of these practices:
Titled ‘The World’s Richest Man’ for many years in the past decade, Warren Buffet is reaping the benefits of share market investments he made over 25-50 years ago. Some investors have earned millions courtesy of stock they invested in with their first earnings when they were as young as 16.
One of the ways in which you can earn from your shares is the compound interest on your holdings. Assuming you invest in stable companies, the value of the shares will grow over the years, as the company grows.
If you are banking on your share market investments to see you through your retirement years, it is pertinent that you start investing in safe shares as soon as you start earning.
Earning from the share market doesn’t involve making a simple one-time investment and forgetting about it. Invest in your chosen portfolio regularly- even a couple of thousands worth of shares every month can lead to a long-term yield running into lakhs. If you find the process of investing weekly or monthly tedious, you can automate the process by consulting your broker or through your online trading account.
Play the long-term game
Buffett states, “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.” Most millionaire and billionaire investors follow this policy of investment. Consistently high returns come from long-term investing. Short-term investments where you hold the stock for less than a year can also prevent you from getting any tax benefits. You will have to pay a higher tax rate than when you hold on to your shares for a longer period.
It is natural to have concerns about a possible economic depression or significant dips in the market. In such a case, you may intuitively think to sell your stock before your stock’s prices plunge further. However, the market has the tendency to correct itself over the course of the years. In the last 100 years, the share market has seen an overall upward trend, indicating that the market is resilient enough to stand tall in spite of occasional dips.
Maintain a diverse portfolio
Investing in different companies in different sectors is advisable. It is possible that some sector may consistently underperform over decades, while some may shut down completely. When you have holdings in different sectors, for example, automobile company, oil and gas, telecom companies, etc., it is highly unlikely that all these sectors will fail together and lead to a loss. When you diversify your portfolio, even if one or two holdings suffer, the others will safeguard you from a total loss.
Warren Buffet offers some advice here, too- “Never invest in a business you cannot understand.” If you invest in a sector that you know little of, you may get blindsided if that industry is disrupted. Apart from this, the simple pleasure of seeing the rise of stock of a sector you like can encourage you to commit to a long-term investment.
Ask for help
Do not shy away from asking for help in understanding the share market. You can consult a mentor, friend, or even seek professional help from financial firms to get a better idea of your stock options. You can even lookup articles, take online courses, attend workshops or seminars, read books to know more about investing in the share market. Let your own discretion along with help from other resources help you make your way to a financially healthy future.
Beware of herd mentality
Asking for help is important; however, avoid succumbing to peer or market pressure. It may happen that a lot of people you know invest in a particular stock but you do not believe in it or you don’t understand that sector. You may not trust the company or find their financials credible. It is better to keep away from speculation which often drives hordes of investors to buy or sell a particular stock. Have faith in your diversified portfolio and your own research to help you surmount the pressure to follow the herd.
Consider a company’s potential
Once upon a time, Elon Musk’s Tesla had few buyers. Today, it is valued at billions, way ahead of its competitors in the technology market. Many investors refused to invest in Tesla because of its past performance. Past performance is a good metric to understand the robustness of a company, but you also need to consider the ideas and innovations that the company is working on. As long as the company has shown integrity, has its financials in place, and promises a good idea, you can risk investing in them.
You now understand the essential working of how you can earn money from the stock market. Now, leverage the professional help from brokers at Angel Broking to get the best advice and guidance on how to earn profits from the share market.