A Quick Guide To Stock Market Investment
Wondering how to invest in stocks and reap big returns? Stock market investment is an excellent way to build wealth. When you buy a share, you effectively purchase a small stake in an established business. This gives you a claim on the profits it generates in proportion to the number of shares you own.
Focus on learning the basics if this is all new to you. Learn how to invest in stock market, build a portfolio, pick the right shares, and so on. That will make things easier as you start to invest in share market.
Importance Of Stock Market Investment
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If you invest in share market, there will be risks. But a stock market investment is still a smart financial move. Here’s why:
- High returns: Invest in share market to potentially earn double-digit returns that protect against inflation.
- Liquidity: There is no lock-in period to worry about. Buy and sell shareholdings at any time.
- Low capital outlay: Shares give you a small stake in an existing company. This is much cheaper than trying to run your own business.
How To Invest In Stock Market
Are you unsure about how to invest in shares? Begin by figuring out your investment approach:
- Invest through mutual funds: The capital collected from a large number of investors is spread across different stocks. A professional fund manager manages the fund portfolio.
- Invest in share market: Once you open a demat and trading account with a dependable broker like Kotak Securities, log in and start investing through the stock exchange.
How To Build A Portfolio
As you learn how to invest in shares, focus on making the right picks for your portfolio. Some stock market investors are risk-averse and prefer to hold stocks for the long term. So, they choose stocks that give steady returns over time. Those with a higher capacity for risk may buy and sell shares on a more short-term basis—over months, weeks, or days.
Figure out which approach works for you before learning how to invest in shares. As a next step, select eight to 10 stocks across a few key sectors. Monitor stock price movements and gather information about the businesses through annual reports, offer documents, press releases, and media reports. Diligent research will help you make smart investment decisions.
Long-term Vs. Short-term Investment
As you explore how to invest in stocks, you may have questions about how long to stay invested. It is a good idea to engage in both long-term and short-term investment. Here’s a look at what each type holds:
- Long-term investment: By staying invested for more than a year, you enjoy a tax exemption on capital gains on equities. If you are new to equities, long-term investments may be more suitable as these are less affected by short-term market cycles.
- Short-term investment: When stocks are held for less than a year, the risk goes up and 15% capital gains tax may apply. But the potential for profit rises as well. There is scope to book profits from sudden price swings.
Large-cap, Mid-cap, Small-cap: Where Should You Invest?
While exploring how to invest in stock market, you may encounter the term ‘market capitalisation’ or ‘market cap’. This refers to the company’s size. What does it mean for you as an investor?
- Large-cap: Large-cap companies are established businesses with strong governance practices. They create steady wealth for investors over a long period. Opt for large-cap investments if you are risk-averse or have a long-term perspective.
- Mid-cap: Mid-cap businesses are smaller than large-cap companies and also riskier as investments. But they may offer higher returns in a bull market because they try to expand aggressively.
- Small-cap: These businesses are smaller and riskier than both large-cap and mid-cap companies. Although highly vulnerable in bearish markets, they have the highest potential for growth in a bull run. Take the small-cap route only if you have high risk tolerance.
How To Invest In Stocks: A Checklist
There is no guarantee of success in the stock market. But these thumb rules could set you on the right path:
- Do your research: Rather than rush in blindly, take it slow and do your homework. Follow your chosen stocks, study micro and macroeconomic trends, and become familiar with the data.
- Be realistic: This is no ‘get rich quick’ scheme. Every stock market investment carries some risk, and the market could move up or down without warning. Hope for profits but be ready for losses as well.
- Don’t invest everything: Put into the stock market only what you can afford to lose. So, decide on a budget and stick to it.
- Diversify: Spread your investments across different companies, sectors, and asset classes. That way, if one group of stocks performs badly, the others could blunt the impact.
- Follow a plan: Prepare a strategy that lists not just the stocks but also your entry and exit policies. This would allow you to act based on logic rather than emotion.
Wealth creation may be your end goal, but to invest in share market, you have to plan ahead and do your research. Also, be disciplined and regular with your investments regardless of whether you invest directly on the stock exchange or indirectly through mutual funds. Over time, this will help you to build a sizeable corpus.