The stock market is like a gold mine for those who invest money in it. It is one of the best ways for an investor to become wealthy. Making money in the stock market is like mining a gold mine, it is both easy and difficult. It is easy if you know how to do it and know where to find the gold. It is difficult if you go in the wrong way, in which case you will end up only with mud and stone. The stock market can increase your wealth. However, if you do not invest wisely you can end up losing all your money.
It is essential to know how to invest in the right stock and profit from stock market. The following are some tips that you can get you started and help you achieve success.
- Understand the market
Before investing in the stock market, you need to understand the market. You need to know how the stock market works and also understand past performance, present situation, and future prospects. Apart from understanding the market, you also need to learn about the industry sector and the company in which you are investing. Investing blindly without knowing anything is dangerous. It is therefore necessary that you understand the market well before you start investing.
- Consider mutual funds
When one talks of investing in the stock market, the obvious reference is to buying stocks. You can also consider investing in mutual funds. This is suitable if you are a first time investor and are not ready to take too much of a risk. In a mutual fund, a professional fund manager would handle the investments. The fund manager would monitor the market and help you build wealth. This is a safer and less risky way of investing in the stock market. Once you begin to earn money and gain confidence, you can then start buying stocks on your own.
- Do your research
After understanding the market, you need to do proper research about the company or mutual fund you want to invest in. This would necessitate reviewing the performance of the company/fund. You can refer to various websites, journals, newspapers, and also do your own study. You need to consider fundamental analysis (based on financial statements and publicly available sources) and also technical analysis (predicting stock movements based on past performance). If you are serious about making money in the stock market, you can even consider doing courses on fundamental and technical analysis. Research is the best tool to help you make an informed decision while investing in the stock market.
- Don’t try to time the market
Buying low and selling high is the secret to making money in the stock market. The problem though is knowing what is low and what is high. If you try to time the market by waiting until the market reaches a low or high before investing, you may be waiting too long. Even veteran investors cannot predict how the market would behave. So don’t try to time the market. Instead, set goals for investment and invest in the market as per these goals.
- Stay for the long-term
To succeed in the stock market, it is necessary to stay for the long-term. You cannot expect to make money overnight or in a few months. If you want to earn wealth, then you need to stay invested for many years. Think for 15, 20, 30 years. That’s the way to earn wealth in the stock market. In the short-term many developments take place in the stock market. This should neither excite you nor depress you. The market has its fluctuations, don’t worry about them. In the long run, the market can help you earn good returns on your investment.
- Go for a systematic investment plan
Instead of investing a huge amount at one go, you can consider a systematic investment plan to invest in the stock market. Whether investing in stocks or mutual funds, you can invest a fixed amount every month. This helps you to slowly and steadily invest in the market. For example, once your research tells you that company X will give you good returns, then invest a fixed amount, maybe 500 every month to buy shares of company X. You need to do this month on month, and year on year. The power of compounding ensures that your investment will grow more in this way.
Assuming an average return of 9%, if you invest just 1000 every month, you can become a millionaire in 25 years. When you earn more, you can invest more money. This will help you accumulate more wealth over a period of time. The main advantage of a systematic investment plan is that if the market falls, then the value of the stock you want to buy falls, which means you can buy more of it. If the market rises, your overall investment rises. The benefits of a systematic investment plan make it ideal for those who want to earn money in the stock market.
- Never get lured by tips
There are lot of tips and rumors circulating that would tempt you to invest your money to buy a particular stock. The tips would tell you that if you invest money in a particular stock, you can expect huge returns quickly. In most cases, these tips are meant to lure small investors into making someone else become wealthy. If you get a tip from a very reliable and knowledgeable source, you can consider it. Else, ignore all tips you get and focus on your strategy of investing.
- Don’t let your emotions get the better of you
Most people who lose money in the stock market do so because they allow their emotions to override logic. Getting tempted to make a quick investment to earn money or refusing to sell a stock because you have some emotional connection with it are sure ways of losing money. You need to be logical and analytical while investing money in the stock market. Emotions have no place in the stock market. Emotions like fear and greed can make you lose your money. So put aside your emotions, stick to your investment strategy, and be disciplined in your approach. That’s the way to be successful.
- Diversify your risk
The stock market has inherent risks. Don’t amplify your risks by putting all your money in one place. Instead of investing 1000 in one stock, you can invest 250 in 4 stocks. This spreads your risk across four different stocks. If one of them fails, the other three can still help you earn money. Whereas if all your money was in one stock and it failed, you lose everything. Also, avoid investing money in the same types of stocks. Invest in companies from different industry sectors.
While investing, you can invest in blue-chip companies (well-known companies with a good track record) or mid-cap companies (companies with a fair market size that are poised to take off), or small cap companies (new companies with a low market capitalization). Based on your market research, try to invest money in each of these types of companies. This is another way of diversifying risk and being safe. The blue-chip company can help you earn steady returns, the mid cap can help you get big profits, even if it fails you have the blue-chip to fall back on. The small caps can take off really big. Even if it fails, you would not have invested too much. Diversification is a must to reduce your risk in the stock market.
- Be realistic in your expectations
Most people enter the stock market after learning about how someone made millions in a few months. This could have happened due to luck or investing extremely wisely. In either case, you should not expect to get the same results. This is an unrealistic expectation that can cause you a lot of pain. Expecting to make a lot of money in a short time is highly unreasonable. You may do it if you are lucky. However, in most cases, it won’t happen. Look at the past record of the market. On average 9% to 12% returns is what you can expect. If you can get more, it is a bonus. Don’t set unrealistic expectations that can demoralize you and affect your investing.
- Don’t put everything in the stock market
You have worked hard to earn money. In the quest to be rich, you plan to invest all your savings into the stock market. This is the biggest mistake you can do. Never invest everything in the stock market. This can be extremely risky and if you lose money, you will be left with nothing. Invest only a part of your savings in the stock market. A thumb rule is to invest (100 – your age) in the stock market. So, if you are 30 years old, you can invest 70% of your savings in the stock market. The rest should be invested in safer options like bonds, bank deposits, etc. The logic here is when you are young, you can take more risks.
As you grow older, reduce your investment in the stock market. When you turn 40, you can have 60% of your savings in the stock market. This helps you reduce your risk gradually so that by the time you retire you have sufficient savings in safer places. This will help you overcome the risk of a stock market crash when you want to take out your earnings from the stock market.
- Book profits regularly
You may be in the market for a long-term and plan to stay invested for 20 or 30 years. This doesn’t mean that you shouldn’t sell some of the stocks to make a profit. When the market reaches an all-time high or the stock you have invest in has given you a windfall profit, don’t hesitate – book the profit. You can always reinvest some of the profit back into the company so that if it goes still higher, you can make money. You should not be placed in a situation wherein after you have a record profit on paper, you stand by and watch the stock fall to a low. You can sell stocks to earn profits but don’t spend it all. Put back the money into the stock market, so you can continue in your disciplined strategy of earning money.
- Get rid of deadwood
Deadwood refers to stocks, which are not earning you any money. Periodically review your investments. Use fundamental and technical analysis to understand how a stock is performing and how it is likely to perform. If you are clear that the stock is deadwood, then get rid of it. If you wait hoping to earn some money from it, you may lose more. Get rid of losing stocks periodically and re-invest the money in better stocks.
- Use the services of an investment advisor
Investing in the stock market to make money requires hours of research and follow-up. If you do not have the time or inclination to do this, you can simplify your job by using the services of an investment advisor. The investment advisor is a financial professional who understands the stock market well. The advisor can suggest stocks for you to invest and help you build a portfolio that can earn you money. The advisor would also monitor the performance of your stocks for you. For doing this, you would have to pay a fee. It would be worth paying a fee to a professional if it can help you build wealth. Make sure you select an advisor who is registered, is well-qualified, has plenty of experience, and has a good track record.