All you need to know about Stock Market Investments

GUIDE TO STOCK MARKET INVESTMENT

Savings is an important part of financial planning. The money you save today may help you to live a better life tomorrow. But people often do not understand the next step: How do you invest your savings to make more money? This is where many individuals fail. In doing so, they lose out on the opportunity to earn more from their savings. Knowing how to create a suitable financial plan can help with one’s investment goals.

For people who aim to create long-term wealth, investing in the stock market is a great option. The stock market remains a popular investment avenue in India. Once you invest in the stocks of the right companies, you stand a good chance to generate attractive returns in the long run. Just get to know the basics of the stock market before investing.

The stock market carries some risk, but it can be a safe investment channel provided you exercise precaution and invest after conducting thorough research. Moreover, the Securities and Exchange Board of India (SEBI) constantly monitors and regulates the affairs of the stock market in order to protect the interests of investors. Hence, you can invest in the stock market without fear.

WHY PEOPLE INVEST IN THE STOCK MARKET

People invest in the stock market to earn returns on their investment. Let’s look at some of the ways in which they hope to gain:

• Long-term capital appreciation
  Some investors purchase shares and hold on to these over different time horizons. The stock market may be subject to risks, but the right shares will see price appreciation over time. Thus, investors can reap great benefits over the long term.
• Regular source of income
  When people buy company shares, they become shareholders of the company. This makes them part-owners of the business. In return, some companies pay out regular dividends to shareholders out of their profits. Thus, many investors look for investment opportunities that bring a regular source of income in the form of dividends.
• Opportunity to diversify
  The wide range of stocks available on the exchanges allows investors to diversify their portfolios. They can invest in companies across sectors and market capitalisation. This would reduce the risk exposure of their portfolio and provide safeguards even in times of volatility.
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HOW TO INVEST IN THE STOCK MARKET

The stock market can a great channel for investments, provided you adopt an effective approach. Here are some tips to help you grab the right stock investment opportunities.

• Identify Your Investment Requirements
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Before investing in the stock market, get to know your investment needs. Identify your requirements and limitations before purchasing any stock. Also consider your risk-taking ability. Individuals who cannot bear the higher risk of investing in the stock market may prefer to invest in fixed deposits or bonds. It may help to explore the types of financial planning at this stage.

• Determine Your Investment Strategy
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After identifying your investment requirements, focus on your investment strategy. Figure out the exact timeframe for which you wish to stay invested. Then shortlist stocks that suit your requirements. For example, if you want to invest for the long run, you could purchase the stocks of large-cap companies. These would ensure capital appreciation over time and bring a steady dividend income. Investors who want to grow their capital and don’t mind the risk could invest in mid-cap or small-cap stocks.

• Assess Points of Entry and Exit
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To take advantage of stock investment opportunities, assess the right time to enter a stock. Many investors overlook this aspect and purchase stocks at any time. But that is not a good approach. Identifying the right entry price can help to maximize your potential profits in future. Similarly, it is important to exit the stock at the right price. This would help you to book profits when the price movement is in your favour or cut losses when the stock moves against you.

• Executing Stock Market Investments
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There are two ways to execute your orders: through online and offline channels. In the online mode, you simply log in to your account and place an order. For the offline mode, you could place orders by telephoning your broker or visiting their branch office. Always double-check the order details to prevent any errors.

• Monitoring Portfolio
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Once you have made some stock market investments, start monitoring your portfolio. The stock market is dynamic in nature and the prices of stocks keep moving up and down. Therefore, it is important to track your investment regularly and exit the stock at the right time. It is also advisable to keep researching the companies in which you have invested. This will help you to prevent or minimise losses if things go south for the company. At the same time, remain patient and do not get carried away with every rise or fall in the price of the stock.

STOCK-PICKING STRATEGIES

Once you know the basics of investing in the stock market, it becomes essential to learn the art of picking the right stocks. Read along to learn about some stock-picking strategies.

• Management of Company
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Before deciding to invest in a company’s stocks, examine the company’s management in detail. The management plays an important role in the growth and future development of the company. Occasionally, you may find that companies which have a bad reputation or poor management are punished severely in the stock market. Therefore, it is advisable to invest in companies that have good management and ethics.

• Debt–Equity Ratio
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The debt–equity ratio of a company indicates the percentage of money that the company finances through its banks and shareholders. It is preferable to invest in companies which have a lower debt-to-equity ratio. Such companies tend to be more stable than those with a higher ratio. Suppose Company A has a debt–equity ratio of 3 whereas Company B has a debt–equity ratio of 2. In this case, it may be wiser to invest in Company B because it’s debt–equity ratio is lower.

• Do Not Follow Herd Mentality
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This is one of the basic rules of investing in the stock market. Inexperienced investors may get trapped into bad deals when they invest in stocks on the advice of friends or family members. One should not follow such advice blindly and invest in stocks just because everyone else is investing in them. A better approach is to carry out your own research and analysis before making any investments.

• Understand the Business
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Before selecting a stock, ensure that you understand the business of the company. Invest in the business rather than in the company. This strategy may help you to understand the future prospects and growth opportunities of a company in a better way. If the business does well, the company will see its stock prices rise. This approach would help if you are planning to invest in an initial public offering (IPO) as well.

• Future Prospects
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The future prospects of a company are a critical aspect for stock market investors. Always look into the growth potential of a sector before investing. Check how sectoral growth might affect the company you plan to invest in. Also, look out for companies which deliver higher growth than the sector average. Such stocks may be worthwhile investments.

• Make Informed Decisions
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Before purchasing any stock you must carry out fundamental research. But many investors avoid doing a thorough analysis of stocks. They may invest in a company just because it is a household name. This is a mistake that you must avoid, for even well-known company stocks may perform badly on occasion.

• Never Time the Market
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Investors sometimes avoid buying or selling stocks because they are trying to time the market. This is never advisable, for catching the exact peaks and bottoms of any stock price movement is not possible. Nobody can do it consistently. Moreover, many people have incurred big losses by attempting to time the market.

• Control Your Emotions
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Investors may lose money if they are unable to keep their emotions in check. Fear and greed are the worst enemies of stock market investors, for they encourage people to take impulsive trading decisions. As an investor, you must keep a check on your emotions. Your decision-making should be based on research and analysis, not on the way you feel.

• Diversify Your Portfolio
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The safest strategy in the stock market is portfolio diversification. This minimises your risk by spreading it across different stocks. So, avoid keeping all your money in a single basket of stocks. Instead, purchase the stocks of multiple companies across different sectors. This way, if one set of stocks does badly, other stocks that are doing better will mitigate the impact on your portfolio returns.