Overview
The term “stock market” seems to be so alien and baffling even to most of the educated people with good careers and handsome salaries. Even I had no idea 4 years ago, nevertheless, I took a risk and started investing in stock markets.
There is a dogma among the public that only the elite community can invest and benefit from the stock markets. Affluent businessmen and investors indeed make millions if not billions in the stock market. But investing in stocks is equally suitable to a common and middle-class person who keeps a part of his or her earnings as savings.
Let us assume that a millionaire invests ₹ 1 Crore on a certain stock for ₹100 today i.e. 13/05/20; the person buys 1 Lakh shares. After one year, he or she decides to sell the stock for ₹125. The investor shall receive ₹25 Lakh or 25% as gross capital gain through the sale of that stock. After taxes, stamp duties, etc. the net capital gain might be around 20%.
The same principle applies to a middle-class person who can invest 1 lakh; he or she can buy 1000 shares. Everything is the same in both cases except for the amount invested. The net capital gain or profit will be 20%. Now, compare it with the savings account interest rate of 3% by the major banks in India. As per the sources, SBI may cut the savings interest rate to 2.75%.
So can anyone make money in stock markets, trading whatever the stocks available? No, it is not that easy as it looks. I have selected four steps that will help you to make a good investment and making money in the stock market:
- Have a strategy
- Fundamentals
- Invest only the money you possess
- Buy at a reasonable price
Have a strategy:
You must have a plan or strategy in mind before investing. Read my article Investment vs Speculation for more insights. You should have a clear idea of returns you expect, duration of investment like the long term (more than a year)or short term (for a few months), and risk involved, etc.
In India, a decent investment should provide a minimum return of 15% per year in the form of capital appreciation at least. It’s simple to calculate; a fixed deposit in a bank pays you around 6% nowadays. The risk associated with a fixed deposit is zero. It is not the case investing in a stock, 9% extra is for the risk you take investing in the stock market.
Again, if a stock yields you 15% in two years, the annual capital gain will be only 7.5% per year. So the duration of investment is also important.
According to me, having a clear picture of the returns or gains, risk involved, and duration of investment is very important before investing in the stock market.
Strong Fundamentals:
Choosing a stock with strong and healthy fundamentals is a must to make money. For a good investment, investing for at least a year or more is compulsory. You must be able to trust the stock with your hard-earned money. I have already posted two articles on how to analyze a fundamentally strong stock. You can go through those articles.
Invest only the money you possess:
This is very essential not only for making money but also not losing money in stock markets. Never commit the borrowed money in any stock. As stock markets are subjected to many fluctuations, the stock you invested might lose its value in the market. It applies to every stock.
For example, TCS is the best software company in India. But it’s share has fallen over 25% since Feb 2020 by 3rd April. It is identical to the whole stock market collapse; the economic recession due to COVID-19 is the culprit.
Just assume that you are urgent need of the cash on 3rd April. You had invested in the TCS stock in February 2020 with the borrowed money, and you do not have the cash in hand to pay off the debt. You will be forced to sell the stock at a 25% loss. But if you had invested your own money, there would be no reason for you to sell at a 25% loss.
Now, as of 13/05/20, a TCS share is trading at only 12% below the Feb 2020 price. After the economic crisis, the stock markets will progress, and TCS shares rise in price.
Buy at a reasonable price:
No matter whatever the stock of a company you buy, if it is bought at the wrong price (high price), the returns will be greatly reduced. It is the main reason why most of the blue-chip stocks provide lower returns compared to mid-cap and small-cap stocks. Because these blue-chips trade at extremely high prices, the returns are impacted.
As the legendary investor, Benjamin Graham said, “we venture the motto, MARGIN OF SAFETY”. The margin of safety is the difference between the stock’s price and its intrinsic value. It involves buying the stock at a discount to its intrinsic value or the real business value of a stock. We shall discuss the intrinsic value in the some other article.
That’s it, buddies! It’s simple; follow the above-stated ideas before selecting a stock and investing. You will find yourself making better choices in investing.
Disclaimer
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID or Contact Form.
