How Do We Make Money in Stocks?

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Make Money in Stock Market

Have you ever thought of wanting to make money through the stock market and have been looking around to unlock a secret?

Oh No, it’s no secret that you have been looking for. You just need to learn that Buying and selling the stock is not what it takes, but for fruitful returns Buying and holding the stock is what will give you desired returns.

Today, we are here to share a few key pointers that you must keep in mind to look forward to making money from stocks over time.

These pointers will help you focus through a wider perspective and usher you to invest in the right way. Firstly, Patience is the main key in the stock market if you have chosen fundamentally strong stocks. So, stay invested in the long term, through good and poor times.

Let’s take a quick insight into the concept:

As we all know banks and other financial institutions do not offer anyway more than 6 to 7 % of interest. Whereas, as history has proven that the NIFTY Or SENSEX Index gives 12-13% CAGR return every year which is significantly more than what an individual receives from the banks and other institutions by resourcing the same amount of time and money. Further, the interest on bank fixed deposits is taxable whereas no tax is payable on dividends until Rs. 10 lakhs.

But we still keep struggling to receive our possibly easy returns.

Investing directly in the stock market is not a piece of cake as the market is featured with volatility. If u invest consistently and stay in the market for the long-term, your money will compound multiple times and will deliver you higher returns than any other investment option.

What helps is not only your money invested in the market but also the amount of time that you hold a security for.

The trick to making money in stocks is to stay on the stock market; the best measure of your overall success is your period of "time on the market." Unfortunately, at the worst times possible, investors frequently switch in and out of the stock market, losing out on that annual return.

Now let’s look at some Dos and Don’ts in detail below;

1. For making money in the stock market, the thumb rule is to stay invested.

The longer you stay in the market, the more substantial your chances get of gaining fruitful returns from stock investments. How does long-term investment benefit you? Long-term investment gives you inflation-adjusted returns, accumulated sums of profit. For instance, if you had invested Rs. 1 lakh into the stock ten years ago, the investment would be worth more than Rs. 25.92 lakhs by 2020.

Let’s look at another such company.

Infosys is one such stock, where an investment of Rs. 10,000 in June 1993 has delivered 2,973 times return to its investors. This means that Rs. 10,000 investment would have now been worth Rs. 2.97 crore at Compounded Annual Growth Rate of 39%.

There are more such companies whose growth at an exponential growth will leave you in awe. No wonder these fruitful returns could only be enjoyed by those who held onto their security throughout.

Understand what type of trader you are. Each trader has his own strategies and style of trading. Understanding your own style of trading and the purpose of investment will help you make better investment decisions and evolve strategies. Capital markets have two essential categories of traders;

1. The Fundamental Trader

2. Speculator.

The fundamental trader is the one who pays less heed to the price of the stock and focuses on the company’s strength based on fundamental points like financial health, management, company’s announcements, and its position in the market before investing. These traders differ from speculators for the way in which they see the stock. This way of analyzing the security of going to great lengths to understand the security states that ‘Fundamental Traders’ look forward to investing to buy security and stay invested to reap long-term benefits unlike the second category, Speculators.

Speculators invest typically for short periods and aim to make profit by changes in its price. So here the major difference that we can make out is that a Fundamental Investor would invest in 20 strong companies and plan to hold those stocks for at least 10 years whereas a speculator would use all his portfolio capital to buy five stocks and expect them to rise over the next few days, weeks or months.

However, the type of trader you are keeps changing as you evolve as a trader. And so, we suggest that you keep analyzing your type from time to time with changing strategies, resources, and experiences.

Excuses that keep you from making money through investments

As the stock market features high volatility and unpredictability, any investor feels off guard and fearful when the stock market falls, so if it even falls a few percent, they panic and sell the security fearing further losses. Yet, investors dive headlong as prices increase. It is a great "buying high and selling low" formula. To avoid any of these extremes, investors should keep themselves aware of the potential thoughts that might come to their minds as new investors. Also, they should learn and overcome these unnecessary fears. Three of the most common thoughts that an investor gets out of fear are here:

  1. I’ll wait until the stock market is safe to invest.

  2. I’ll buy back in next week when it’s lower.

  3. I’m bored of this stock, so I’m selling.

  4. Index funds or individual stocks?

  5. Try and avoid the herd mentality

  6. Never try to time the stock market

  7. Have a disciplined approach for investment

  8. Never let your emotions influence the judgement

  9. Always have realistic goals

  10. Always invest your surplus funds

'I’ll wait until the stock market is safe to invest.'

After the investors have sold the securities due to the stock prices dipping for a few days in a row or over the long-term, the investors tend to decide on waiting for the stock market to become safe again to invest. But when investors say they're waiting to make it safe again, they mean they're waiting to make prices go up. So waiting for a security is just a way to end up paying higher prices, and indeed, investors do pay for just a view of assurance. That is to say, at any expense, investors would rather stop a short-term loss than obtain a longer-term benefit. So, if you feel the pain of losing money, you're likely to do whatever it takes to avoid the hurt. So, even though prices are cheap, you sell stocks or don't buy them.

'I’ll buy back in next week when it’s lower.'

Each investor looks for the best of returns from their investments. With a motive to gain high profits a prospective investor is much likely to wait for the prices of the stock to drop. But investors never know how stocks will move on any given day, particularly in the short term. A stock or market could rise just as easily as next week's decline. What generally a smart investor would do is buy a stock at a lower price and hold it for a long term.

What drives this conduct: Fear or greed may be it. Before next week, the fearful investor may worry that the stock will fall and wait, while the greedy investor expects a fall but wants to try to get a much better price than today's.

'I’m bored of this stock, so I’m selling.'

This excuse to self is used by investors who look for excitement in their investments.

Investors have been holding on to some stocks for years and years and have made compounding returns. Ordinarily, investing is anything but a fast-hit game. All the profits come from the market while you stand by, not while you're selling. What drives this conduct: the requirement for excitement from an investor. The mixed-up idea that successful investors are exchanging each day to acquire large benefits can spark that urge. However, a few merchants do this productively, and they are dependent on the outcome. It's not about enthusiasm and thrill for them, yet rather it is about generating money, so they try not to settle on emotional choices.

Index funds or individual stocks?

Index funds or Individual funds can be a question that arises in your mind very often.

Let’s find out!

When you buy an index fund, you are buying a basket of stocks. Investors who buy shares of an indexed fund own shares of stocks in dozens or even hundreds different companies indirectly.

It does not require you to keep track of the portfolio, read company’s annual reports.

So if you want an average of around 10% of returns, avoid keeping a track of the company’s growth and keep your costs low, this is the fund for you.

Whereas when you buy individual funds you are buying stocks of a company, and becoming part owners of it. So as the company grows you enjoy the proportional share of profits or bear proportional losses based on the total ownership you hold. On the other hand, it requires you to do thorough research and understand the market, be familiar with your company’s business, track its growth, income statements, strategy, management, and more. Just as they say, “nothing comes easy”, this fund requires your time and attention but alongside offers you more than average profits based on company’s success. There are many individuals who have made it big stock trading with discipline, patience, and experience.

Try and avoid the herd mentality

Just like we discussed at the beginning of this article that each investor should analyze their investment goals and strategies on their own. So you might now know that the benefits of stock will vary from investor to investor as the resources, goals, time and strategies also differ. Hence it is advised that you should not follow the herd for your investment decisions. Do not get influenced by other people’s buying strategies and buy or sell the same stock as they do. Avoid such practices that do not allow you to reap benefits in long-term.

Never try to time the stock market

Just as we all know, the Stock market is unpredictable and volatile. Timing the market means to predict the movements of the market to buy and sell your stock on expected fluctuations. Timing the stock market is a bad idea because it has no edge. It is just not possible to predict any stock’s top and bottom values. So no matter what analysts tell you, never make your investments timing the stock market.

Have a disciplined approach for investment

Research the history of stock markets and one will note that investors have had a lot of panic moments, including the best bull runs in the stock market. Several investors have lost money due to high volatility in financial markets, even though markets have a bullish pattern. At the same time, outstanding returns have been generated by all those investors who put in their funds with a disciplined approach. If you have a long-term benefit in mind, have an investment strategy that is systematic.

Never let your emotions influence the judgement

Emotions play an important role in investments as it is your hard-earned money that is involved here. A lot of investors lose control over their emotions and as a result, they happen to lose money due to wrong decisions in haste. One such incident could be the urge to make more money while the market is bullish and at that moment, not every security could be high return yielding security. Not every security’s prices will shoot up just because they have fallen rapidly. It is very important that you choose your securities wisely and not unwarily.

Always have realistic goals

Aiming for the best is not wrong but using calculative methods to achieve your financial goals will help you measure your progress and mistakes in trading sooner. To avoid some trouble, start with not expecting any exponential or unrealistic returns from your investments and gradually you can track the growth of your stocks and expect reasonable/ potential returns from them.

Always invest your surplus funds

If you are a beginner in trade, it is advisable to use only your excess funds for investing initially. And going forward you can reinvest with the added amount of profit you’ve earned. This way you will learn by investing small capital and also you can prevent yourself from getting into debt.

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