How to build wealth by Investing in Stocks

Everyone would like to be wealthy and have enough money to enjoy life. Wealth building to most people seems to be a difficult proposition. Those who earn regular income feel they may not be able to do it. The reality is that it is not difficult creating wealth. It just requires a systematic approach. One of the best ways of creating wealth is through the stock market. Investing in the stock market is a great way of creating wealth, even for a small investor.

Clichéd as it may sound, the rules of striking gold in the stock game are simple – planning, patience, and long-term commitment.

Agreed, big money is made and lost overnight in stock but once you know the waters you are treading, creating wealth shouldn’t be an issue. If you think it is all about staring at the computer screen all day, making rapid trades and keeping track of what big Fortune 500 companies did, it’s not going to help. So, what is that can help you make money in the stock market? We look at some tips that you can follow to make money investing in stocks.

1. Start with a plan

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Before you do any activity, you need to plan it. Investing money in stocks is no different. You need to plan your investment. The first thing is to understand your risk appetite. The stock market can make you wealthy beyond your dreams; it can also make you lose all that you have. That is a risk you are taking to earn a reward. When you take risks, don’t do it on your life savings. Have money for contingencies and use a part of your regular income to invest in the stock market.

Decide how much money you can afford to invest in the stock market. You need to make a budget and understand your income and expenses. Estimate how much money you can save and use some of it to invest in the stock market. Younger investors can invest up to 80% in the stock market, with the rest in safer investments like bonds. As you grow older, you can slowly reduce your investments in the stock market to reduce your risk exposure.

All this calls for planning. You need to make an investment plan in a systematic way. You can take the help of a professional investment advisor to make a plan. If you have a bit of financial knowledge, you can do your own research and plan yourself. Make sure you set your investment objectives. Identify how much wealth you want to generate and for what purpose (buying a home, children’s college education, retirement funds). Based on that, make a plan.

2. Think long-term and stay the course

There are lucky investors who strike gold with their investments within a few months. Such stories are rare and few. Slow and steady wins the race for the tortoise and for the stock market investor. You need to think about the long-term when you put in your hard-earned money to buy stocks. Don’t hope to become rich in a couple of years.

The secret to wealth creation is perseverance. Stay invested for the long-term and there is no reason why you can’t become wealthy. On average, the stock market gives a return of 9%. When compounded, investing just 2800 every year can make you a millionaire in 40 years. It makes sense to stay invested for long term. Stay the course and your dreams can come true.

3. It is a roller coaster ride, so hold on tight

Once you start investing in the stock market, it’s important that you don’t stop. Time is your biggest ally in this business. It takes time to make money in the stock investment, but the key is to keep going. People who have made it big in the stock market have mostly kept their money in the market for long periods – even fifteen years if not longer. Most of them have reaped great results.

Investing in the stock market is like a roller coaster ride. Sometimes you are on the top and sometimes you can come hurtling down. So, hold on tight and don’t jump off. The market has its highs and lows. When the market falls, don’t panic. It will recover! It may take a few months or even a year or two. When you are there for the long term, don’t worry when the bears take over, the bulls will come back for sure.

4. Don’t lose your sleep

There is no one rule for everyone when it comes to investing in the stock market. Make sure you assess your situation well before making an investment. Don’t make an investment you’re not comfortable with. If you can’t sleep at night thinking you will lose your money, you probably will. Have an objective regarding where you want your investment to take you.

You may be looking to generate tax-free interest, preserve capital, or create current income. If you have an idea of what your objective is, you should be good. Never invest in stocks just because your friends, family or neighbors are doing it. Make an informed decision and invest in stocks that you understand. Don’t invest in any stock blindly, do your own homework. That will ensure you don’t lose your sleep.

5. Create a diverse portfolio

You must have heard of the saying – don’t put all your eggs in one basket. This holds good for the stock market too. Don’t invest everything in one company or similar type of stocks. The secret of minimizing your risk and getting optimum returns is to diversify your portfolio across instruments and assets. There are a few factors to be noted to know how to spread your risk. Some of the factors include fixed income, real estate, company growth and value irrespective of size, commodities, real estate, emerging markets etc.

The number of investments in stock market you make is not as important as how you spread your risk. There are various types of stocks. For instance, you have blue chip stocks of established market leaders, where you are unlikely to lose money and can expect steady growth. You have small and mid-cap stocks of emerging companies. These are the companies poised to take off and can help you get huge returns. So, invest some of your money in blue chip companies and some in small and mid-caps.

Also, invest across sectors. Don’t put all your money in one industry sector. For instance, if you put all your money in IT stocks and the IT industry faces recession then you can end up losing money. Buy stocks of companies from different sectors. This ensures your risk is very well diversified. Even if one company or sector faces a setback, you would have others to fall back on. Also, make sure you re-allocate or rebalance your investment in different sectors every six months.

6. Don’t ever try to time the market

The secret to earning big in the stock market is to buy low and sell high. How do you know what is high and what is low? It’s never a good idea to time the market. Even ace investors like Warren Buffet wouldn’t dare pull such a stunt. Small investors plunge into the market at the slightest surge in the stock market. It’s not always a great idea to go with the positive investor sentiment, instead of looking at the companies’ profit performance.

Instead of trying to time the market, you should rather invest over a period in a systematic manner. Also, avoid investing in smaller companies when the market is high. Such stocks may look lucrative but they tend to be quite volatile. Leave it for seasoned investors. A systematic investment plan is a good way to invest in stocks. Invest a fixed sum of money every month to buy select stocks. When the market is at a high, your overall investment appreciates. When the market is down, you can buy more stocks. Systematic investment is a great option for small investors.

7. Review your investments periodically

Now that you have invested money, probably in a systematic investment plan, you can sit back and relax and watch your money grow, right? No! The market doesn’t work that way. You cannot afford to take things easy. The stocks you selected were the ones that were doing well or expected to do well. However, you never know what can happen in the future. You need to track how the stocks you have invested in are performing.

You need to periodically review your investments. If the company you have invested in is sinking and is expected to face serious problems, then it’s probably time to stop investing in that company. Similarly, the sector in which you have invested may face serious issues, which are unlikely to be resolved soon. These things do happen and in such a situation, you need to review your investment and decide on whether you want to continue investing in those stocks or change your investment.

When you make an investment plan, it is not something that holds good forever. You need to review your plan and make changes in it. Various situations like change of job, hike in salary, loss of job, or addition in family can happen. You need to relook at your investment plan and make changes accordingly. So, review your investments and your investment plan regularly.

8. Cut your losses

If you find you are making losses with one or two stocks, then it is time to take a hard look at these stocks. You need to review the performance of these companies, the industry sector they are from, and understand their future prospects. If you feel the stock holds no future, cut your losses. Sell the stock and take whatever money you get. You can use it to invest in some other stock that is doing well and has better potential. These are decisions you need to take fast, else you can end up losing everything. It is essential that you follow news regularly and are aware of what is happening in the stock market.

9. Book profits

The stock you bought for 100 may have risen to 1000. What do you do? If you feel that your stock has earned sufficiently for you, then go ahead and book profits. You can always reinvest your profits back into the company, if you feel it will continue to do well. Book profits when the market reaches new highs. You can always get back into the market. Don’t be in a situation where you watch your profits slipping away and rue the situation.

10. Don’t get emotional

The stock market is cruel. It has no places for emotion. Getting emotional and sticking with the stocks you bought because you liked the company or because the stocks came to you from your dad will not help. Be logical and analytical. Understand what is happening and take a decision based on data. Don’t ever be emotional with a stock for any reason. An emotional investor is unlikely to succeed.

11. Take help from brokers

Getting a good investment broker to handle your transactions really gets you going. If you’re just starting out, and don’t feel very confident, get yourself a full-service broker. You may even choose to go with an online brokerage firm. Just make sure you tick a few things off the list when you are going with an online brokerage firm. Check if the broker is registered and approved by the regulators.

You can also use the broker’s service for investment planning, if you wish. This will save you the trouble of regularly monitoring your stocks. The investment advisor would do this for you. Make sure you select an advisor who you can trust and has a good reputation in the market.

Well, these are the simple rules of making it big in the stock market and building wealth. Happy investing!