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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 is no secret that you have been looking for it. 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 sharing a few 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 broad perspective and usher you to invest in the right way.
Firstly, patience is the 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 us take a quick insight into the concept:
As we all know, banks and other financial institutions do not offer more than 6 to 7 % of interest. While history has proven that the NIFTY or SENSEX Index gives a 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 full of volatility. If you 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 matters is not only the money you have invested in the market. But also the amount of time that you are holding the security.
The trick to making money in stocks is to stay in the stock market. The best measure of your overall success is your time on the market. Unfortunately, investors frequently switch in and out of the stock market, losing on that annual return.
Now let us look at some Dos and Donts in detail:
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 of gaining returns from stock investments. How does long-term investment benefit you? The 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.
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. But these returns could only be enjoyed by those who held onto their security for the long term.
Understand what type of trader you are!
Each trader has a unique strategy and style of trading. Understanding your trading style and the purpose of your investment will help you make better investment decisions and evolve your strategy. Capital markets have two essential categories of traders:
The Fundamental Trader
The fundamental trader is the one who pays less heed to the price of the stock and focuses on the strength of a company, based on fundamental points like financial health, management, announcements, and its position in the market before investing. These traders differ from speculators for how they see the stock. This way of analyzing the security and 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.
Speculator
Speculators invest for short periods and aim to make a profit by the change in its price. So the 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 ten years. On the other hand, speculators would use all their 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 trader type from time to time by 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.
Some of the most common thoughts that an investor gets out of fear are:
I will wait until the stock market is safe to invest in it.
I will buy back in next week when the price is lower.
I am bored of this stock, so I am selling it.
Index funds or individual stocks?
Try and avoid the herd mentality
Never try to time the stock market
Have a disciplined approach for investment
Never let your emotions influence the judgment
Always have realistic goals
Always invest your surplus funds
Let us take a deep dive into these thoughts.
I will wait until the stock market is safe to invest in it.
After the investors have sold the securities due to the stock prices dipping for a few days, the investors tend to wait for the stock market to become safe again to invest. But when investors say they are waiting to make it safe again, they mean they are waiting to make prices go up. So waiting for 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 stop a short-term loss than obtain a long-term benefit. So, if you feel the pain of losing money, you are likely to do whatever it takes to avoid the hurt. So, even though prices are low, you sell stocks or do not buy them.
I will buy back in next week when the price is lower.
Each investor looks for the best of returns from their investments. With a motive to gain high profits, a prospective investor will wait for the stock prices 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 as simply as next week's decline. What generally a smart investor does? He buys a stock at a lower price and holds it for the 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. On the other hand, the greedy investor expects a fall but wants a better price.
I am bored of this stock, so I am selling it.
Investors who look for excitement in their investments use this excuse. 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 are 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 huge benefits can spark that urge. However, a few merchants do this productively, and they are dependent on the outcome. It is not about enthusiasm and thrill for them, 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 us find out!
When you buy an index fund, you buy a basket of stocks. Investors who buy an index fund own shares of dozens or even hundreds of different companies. It does not require you to keep track of the portfolio or read the annual report of the company. So if you want an average of around 10% of returns, keep your costs low, and do not want to keep track of company growth, then this is the fund for you.
Whereas when you buy individual funds, you are buying stocks of a company. And become 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! It requires your time and attention but offers you more than average profits based on the company’s success. Many individuals have made it big, stock trading with discipline, patience, and experience.
Try and avoid the herd mentality.
We discussed at the beginning of this article, that each investor should analyze their investment goals and strategies. 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 long-term benefits.
Never try to time the stock market.
Just as we all know, the Stock market is unpredictable and volatile. Timing the market means predicting the market movements 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 the top and bottom values of any stock. So no matter what analysts tell you, never make your investments timing the stock market.
Have a disciplined investment approach.
In the history of stock markets, one will note that investors have had many 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 a systematic investment strategy.
Never let your emotions influence your judgment.
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. At that moment, not every security could be a high return yielding one. Not every security’s prices will shoot up just because they have fallen rapidly. It is important that you choose the 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 then reinvest with the added profit you have earned. This way, you will learn that, by small capital investment, you can prevent yourself from getting into debt.