Investment is key to a safe and secure future. The lure of high returns has been a key attraction for investors to the share market. Share market offers the lucrative opportunity of purchase and trade of securities such as stocks and options. Investing in the share market is challenging, as well as a learning experience. It requires oodles of patience and discipline and a great deal of research and a sound understanding of the market. The volatility of the stock market adds to the investors' perplexity of wanting to invest, hold, or sell in such situations. Let us understand the initial steps involved in taking up these challenges of venturing into the investing journey.
How to Start Investing in Stock Market?
Investing is no longer a cumbersome process for a beginner. The convenience of online trading and the host of technical analysis and reports provided by the broker simplifies the entire process for the newcomer. All one needs to do is evaluate and narrow down on choosing a suitable broker based on the services and good reviews from the existing clientele. To commence one's investing journey, there are a few prerequisites that the investor needs to fulfill.
To begin with, one needs to open a trading and a Demat account. A Demat account provides the holder with the facility to hold his securities and track the same in an online format. This account needs to be opened with a Depository participant. A trading account enables one to buy or sell shares. The account comes with a unique trading ID, to carry out the transactions. One needs to be registered on the stock exchange to carry out trades. The broker is a registered member, and the brokerage firm will carry out the trades on your behalf.
This can be done online by furnishing your Aadhar, PAN card details, date of birth, and mobile number. An OTP would be sent for verification, and the final step is to make the account opening charges. Once the required documentation has been submitted and the necessary payments made, it would take about 24 to 48 hours to activate your account. And voila, you enter into a challenging world of trading and investing. Avail of all the services that your broker would provide you and take your baby steps into a rewarding journey.
Investing in the share market can be done with two different approaches - Investing or Trading. Let us delve into these concepts to get a better understanding.
Investing vs Trading
Wealth creation in the stock market has two genres - investing and trading. Both have very different approaches to wealth creation or generating profits in the financial market. A suitable analogy would that imagine you and your friend have purchased an equal number of seeds to sow in your fields, but you decide to sell them to someone within a day to earn profits. But your friend sowed the seeds and allowed them to grow for a couple of years till they gave new seeds. He further sowed the new seeds and continued this for years and sold a lot more seeds eventually than were bought.
By sowing his seeds, your friend has made a profit quite different from what you made by trading your seeds. This is the simple difference between investing and trading. Traders trade with equity with the aim of earning short-term profits. Their focus is on a stock's technical factors rather than a company's long-term prospects. Investors have a long term outlook. Investors invest their money for some years, decades, or even more extended periods. Short term market fluctuations are insignificant in the long-running investing approach. Investment is an art of creating wealth by compounding interest and dividend over the years by holding quality stocks in the market. They also benefit from perks like bonus shares or stock splits.
A trader can take advantage of the falling prices or can outperform the market. As they buy and sell frequently, their returns are frequent and recurring, giving them the option of reinvesting. Due to their short term investment horizons, it reduces their exposure to market risk.
However, both trading and investing imply risk in your capital. The choice to become an investor or a trader depends on your mindset, risk appetite, and financial goals you have set yourself.
Golden Rules for Investing in Stock Market
Investing in the share market can be risky; however, these risks can be mitigated. All one needs to do is define your risk appetite and investment goals and, accordingly, make your move. To date, no one has discovered a sure-shot formula to succeed in the stock markets. Let us now map out a few golden rules that may increase your chances of getting a good return if followed prudently.
You may choose to be a trader or an investor, but here are some pointers that would help you minimize your risks and make a calculated decision.
1. Avoid the herd mentality.
When it comes to investing or trading, one needs to make a well-informed decision and not be influenced by others' actions. Hence, if everyone around is investing in a particular stock, there is a tendency for potential investors to follow the same route. However, this strategy is bound to backfire in the long run.
Warren Buffett was surely not wrong when he said,
"Be fearful when others are greedy, and be greedy when others are fearful!"
2. A well-informed decision.
Detailed research and analysis need to be undertaken before investing in stocks. Your brokerage firm would provide you with ample charts and expert advisory and guidance in finding current and future trends in the development of different sectors. For traders, a variety of algorithms have been created, and they offer other features like real-time information, alerts that assist in managing positions. One can strategize their investments accordingly
Just as how one rotten apple can spoil the entire basket, inadequate performing stocks can offset the profits from others and taper down your portfolio valuation. Therefore be patient and carry out the required due diligence exercise while picking a stock and at the right price.
3. Invest in Financially sound companies.
This has been a piece of advice given by most experts from this field. Never invest in a stock, instead invest in a business. Investing in shares of those reputed companies who have been in the market for a long time, are financially stable, and have a good track record of consistent growth and returns in the past many years.
4. Follow a disciplined investment approach.
A systematic and disciplined approach to investment has always been beneficial to the investor. As a trader, define the extent to which you would hold on to stock before you buy or sell. As a value investor, you must hold on to your investments through the market's ups and downs. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a broad, long-term picture in mind.
5. Diversify your portfolio.
Diversification of portfolio across sectors, mid-cap, and large-cap stocks. This is a crucial factor in earning optimum returns on investments with minimum risk. The level of diversification depends on each investor's risk-taking capacity. Instead of keeping all eggs in one basket, have the best possible mix of stocks. It helps to avoid unnecessary risks.
6. Never borrow to invest.
As a prudent investor, it is advisable only to invest your surplus funds. Stock market investing involves risk, and there will be occasions where a wrong decision or the volatility of the market will result in losses. Therefore borrowed funds would only add on to the existing risk you will be undertaking.
7. Keep a tab on your investments.
We live in a global world; therefore, any important event in any part of the world will impact our financial markets. Hence we need to continually monitor our portfolio and keep affecting the desired changes in it.
Each investor has to identify their own personal investment strategies that are in line with their individual goals. There is no right or wrong answer as long as one behaves rationally, using facts and data to back up your decisions. Take the plunge and start investing in the share market. One can opt for a DIY mode or would like someone to manage the process for you. For those who are hesitant and require more guidance, get in touch with a Finology in the right direction. Having detailed out the aspects of how to invest in the Share market, I'm confident that you must be telling yourself - 'Investing isn't as hard or complex as it seems.'