How to earn money by investing in Stock Markets
You can earn money by investing in Stock Market and by trading in Stock Market. In this post, we will concentrate only on Investing in Stock Market for returns.
The first thing to remember is that the opportunities for huge returns through investments are very rare in Stock Markets unless you enter via IPO or at startup stage of companies. Even then no one can predict the future and your investments may yield losses. But the opportunities for steady returns is huge in the stock market because in general stock markets rise in value over long term.
Tips to earn money by investing in Stock Market:
If you are going to invest in Stock Market you can do it directly by buying up companies you believe to have strong fundamentals and also indirectly by buying mutual funds in which the fund manager makes the decision of buying the best stocks. Unless you are financially literate it is better to stick to mutual funds.
When you are investing in Mutual Funds make sure to invest in low-cost funds where expense ratio is very low and exit load is very low or nil. Otherwise, all your profits will be eaten by these and overall gains may not be on par with gains of a general stock market. It is even better to invest in low-cost index funds which track the performance of the stock indices and you can with a glance at stock indices know the performance of your index mutual funds.
Diversify your investments in mutual funds by investing in at least 3 or more mutual funds. Also make sure you are diversifying across large, medium and small-cap stocks. Don’t move your funds frequently between mutual funds. Buy and Hold for the long term so that your investments appreciate a lot by the effect of compounding. Always invest in growth mutual funds.
If you are going to invest in individual stocks of companies using your own knowledge and expectations then be careful so that you are not betting a lot on a single company. Diversify at least across 20 companies so that no company has more than 5% of your total investments. Make sure the company you are buying is a trustworthy company with strong fundamentals and is in profits and low debt.
Stock market goes through cycles of boom and bust based on emotions of investors in the market. It is better to be contrarian and go against your emotions like fear and greed. If stock market collapsed and everyone is getting out of the stock market then you should use that opportunity to buy the best stocks at low cost. When the stock market is at all time high and everyone is buying into it you should resist the temptation and sell instead. Then wait patiently for the opportunity to buy.
Remember that stock market goes through long-term trends and boom and bust are common the only way to reduce risk is to diversify and holding the investments patiently for a long time. The ideal way to invest in stock markets is via SIPs that will deduct a part of your salary every month and invest in your chosen mutual fund. Through this method, you average your purchase price regardless of the boom or bust phase the stock market is going through. Never invest a lump sum in one instant and spread your purchase across a time period in small units and the best way to do this is via SIP.
Finally, make sure you book profits whenever stock market shows abnormal growth and your investments gained a lot. This is especially true when the stock market is at the all-time high. That’s the time you should slowly start selling to turn your paper profits into real profits. Otherwise, you might end up losing all your paper profits and again wait for many years to get back those profits. Also, your investments in stock markets should never exceed 25% of your total investments. Stock markets are not secured investments in the sense of fixed deposits or debt instruments so you should be careful not to expose most of your investments to stock market.
This is Guest post from an ex-banker Sohith Agepati, who is a Financial Advisor, Chartered Associate of Indian Institute of Banker (CAIIB) of IIBF.He blogs his views at Sohith.com.