Investing in the stock market is what most people advice to those who wish to become wealthy. Investing money to buy stocks can be a good idea as it can yield great returns on the investment. If you are a beginner and want to start investing in the stock market, then this article will tell you how to go about investing in stocks. Before you start investing your money, you need to understand the basic of stocks, and how to pick a stock to invest in, and how to actually buy a stock.
Basics for beginners
So, you want to buy stocks? What are they and how do you earn money from them? Stocks or shares as they are referred to, represent ownership of a company. A business can operate in a small way being managed by one or more people. When a business decides that it is time to expand operations in a big way, they would be in need of funds for their expansion. One way of doing it is to get money from the public by offering stocks. When a company goes public, it is listed on a stock exchange or stock market. This is where the stocks of the company are bought and sold.
Companies would keep a majority of the stock with their founders and directors so that they retain the ownership. A percentage of the stocks is offered to the public, who can buy it by paying a price for it. Once the company is listed on the stock market, its price is decided by market conditions. Just as the price of any product is decided by how much demand there is for the product; similarly stock prices are decided based on the demand fir the stock. This is decided based on the performance of the company and other related factors.
When you buy stocks of a company, you are one of the owners of the company. The extent of your ownership depends on how much stock you own. If you own 51% of the stock, then you can run the company. The stocks an investor buys would be a miniscule percentage of the overall share. Buying a stock entitles you to a dividend that a company may offer to its stockholders with whom they share their profits. You can also attend stockholder meetings to elect the directors and participate in decision making.
The principal reason why a beginner invests in stocks is to make money. The prices of stocks in the stock market would keep changing every day. If the company has some good news to offer or in case of any positive developments in the industry or the economy in general, there would be a demand for the stock and its price would go up. If you own 100 stocks of company X and its price was 200 when you bought it and its price now is 220, you have made a profit of 20 x 100 = 2000. In this way, whenever prices change you either make a profit or a loss.
This is how the stock market works. On a daily basis, prices fluctuate. Sometimes you would be in a profit, sometimes in a loss. A stock market trader is one who looks at making profits on a daily basis. However, investors are those who want to earn wealth from the stock market. For this one needs to stay invested for a long duration of time, usually for many years. It can be 10 years, 20 years or even 30 years. Investing over a long duration of time ensures that you can make good money.
Decide your investment goals
Now that you know the basics of stocks, you are ready to start your journey to wealth creation by buying stocks. Prior to buying, you need to know the answer to one question and that is Why are you buying stocks?The answer to this question would be obvious – to make money. However, why do you want money? Is it for your retirement or to buy a new house or for your children’s college education? You need to define your goals or the reasons why you want to invest money in stocks. The goals will let you know how much money you need and you can decide when to sell your stocks.
Your investment goals could be broken down as follows:
- To buy a new car in 2021, amount needed 40,000
- To buy a new home in 2025, amount needed 200,000
- To pay for college education for your children in 2031, amount needed 150,000
- To create a fund for use post-retirement, by 2040, amount needed 1,000,000
In this way, you need to identify goals that tell you how much money you need and by when you need it. You need to start investing money in stocks (and other assets too) to earn that money. When you reach your target, you can sell the stocks you own, so your money is ready for use. Setting goals in this way helps a beginner carry out investment in a systematic way. These goals need to be set from the day you start earning money. The more you postpone this, the more would be the amount you have to save to achieve your goals. The secret of making sufficient money in stock investment is by starting early.
Decide on the amount to be invested
The amount to be invested depends on your investment goals. Here is how it works. On average, investments in the stock market earns a return on investment of around 9%. If you are lucky, you can earn more than that. When you invest, you must invest in a systematic investment plan, where you keep investing money every month to buy stocks. This is a better option than investing a lump sum money. Investing a fixed amount every month ensures that you are able to compound your money, i.e.: your wealth keeps increasing with each investment. This allows you to earn more money from your investment.
Since the stock market fluctuates, when the price goes up, the overall value for your investment would be high. If the price goes down, you can buy more number of shares for the money you invest in that month. This is beneficial for investors. You need to invest money every month systematically without fail to be able to earn money. Let’s consider the example above and take the first investment goals. You need to earn 40,000 in 2 years. This means you need to invest 1,550 every month in buying stocks for the entire 2 years.
For your retirement goal, you need to earn a million in 21 years. For this, you need to invest 1,400 every month. You can thus calculate how much money you need to invest to earn the amount as per your investment goal. This is assuming returns of 9%, it possible to earn from than that. But you can use a conservative calculation to start off.
So, now you know why to invest money in stocks and how much money to invest monthly. The next thing is to decide which are the stocks you can invest in that will definitely get you returns of 9%.
Which stocks to buy?
For a beginner, this is one of the toughest things to do. Deciding which is the best stock is not so easy. It requires analysis to understand the market, to understand the performance of a company, and many other factors. Beginners would find it difficult to do this. So, who then do you decide which stocks to buy? Here are some ways you can take this crucial decision:
- Do your own research: If you are ready to put in efforts and learn, you can use tools like fundamental analysis and technical analysis to understand which stocks can give you good returns. If this is too much for you, then you can skip this part.
- Advice from analysts and experts: Analysts who do their own research would make suggestions on which stocks to buy. These suggestions can be taken from reputed financial websites, financial newspapers and magazines, and TV shows that advice people on investment.
- Use the services of an investment advisor: An investment advisor is an expert who charges a fee and advises how on how to build a portfolio containing stocks and other investments. They are professionals and if you work with one who has a good track record, you can be expected to get good advice. This is something you can seriously consider.
At this point, you need to understand one more concept, which is diversification. What this means is that you should not invest everything you have in one stock or one particular segment. Spread or diversify your investments, so that you reduce the risk. The stock market has its inherent risks, you can reduce it by diversification. You can invest money to buy 2-4 different stocks, instead of one stock. Similarly,don’t invest in one sector, invest in different sectors. If one fails, the other can do well.
How to buy?
Now that you have decided on which stocks to buy, you need to actually start the buying process. You cannot buy stocks directly from a stock exchange. You need to buy them through a broker who is registered with that exchange. A stockbroker would open an investment account for you to buy stocks. To open the account, you need to submit a form and provide certain details and documents. You would also need to link your bank account to your investment account. This will ensure that money will be directly debited from your bank account to buy the stocks you have decided on. You need not write a check every month for this.
Once you open the account, you can ask your broker to buy stocks for you. Alternately, you can do it yourself. The broker would give you access to software using which you can buy and sell stocks. If you don’t have the time for all this, you can ask your broker to start a systematic investment plan, so that every month money gets automatically debited from your bank account and stocks would get added to your portfolio. Earlier, a stock-owner would have a certificate. Today, since everything is online, your portfolio is updated every time you buy some stocks.
You can sell stocks when you achieve your investment goals. You can sell stocks if the stock you purchase is not doing well. It is always better to get rid of such deadwood with a little loss, rather than hold on desperately and suffer heavy losses. When you decide to sell the stock, you can inform your broker or sell it yourself using the software provided. The price of the stock at the time of execution of your sell order is considered as the sale price. Once you fix a target based on your investment goals, you can sell without worrying about the exact price of the stock on that day.
You can also sell in one more scenario. This is when the stock market reaches an all-time high, or the stock(s) you bought have done exceedingly well. This is called booking profits. Book profits by selling all or some of your stocks. DON’T spend the profit. Wait for prices to fall a bit and then invest again in the same stock or some other stock.
Monitor your investments
If you use an investment advisor’s services, they would help you monitor your investments. Otherwise, you need to do it yourself. Once a month check the performance of the stocks you purchased. Also, go through news related to the stock market and the company you have invested in. This will help you understand if you have made a good investment or need to make changes in your portfolio. Start visiting websites of financial analysts and financial magazines. That will help you understand more about the market. This will make you a confident investor who can be assured of making money and achieving your investment goals.