If you have decided that you want to become rich, then you would have realized that you need to invest your money wisely to achieve your goal. The stock market is one of the best options for investors to earn good returns and become wealthy. Now that you have taken a decision to invest in the stock market, you need to know what to do next and how to do it. There are many things that you need to be aware of before you start investing in the stock market.
The following are some of the important things you need to know in order to invest in the stock market:
1) The basic concepts of stocks and stock market
Some basic concepts about the stock market need to be understood. The market is traditionally a place where goods and bought and sold. In the same way, the stock market is where securities are bought and sold. There are various types of securities, stocks being the most prominent among them. Stocks can be bought from a stock exchange. A stock exchange is where the buying and selling of stocks take place, e.g.: New York Stock Exchange, NASDAQ, Japan Stock Exchange, Shanghai Stock Exchange, London Stock Exchange, Euronext, Bombay Stock Exchange, etc. Companies are listed with a stock exchange and offer their shares or stocks through the stock exchange.
A company that needs money for its new projects or expansion can go public and invite institutional investors and the general public to invest money. This is done through the stock market. Once the company is listed on the stock market, it offers shares for sale through an initial offering. These shares can be purchased based on the price offered by the company. Once the company is listed on the stock market, its market price is determined. If it is more than the price you bought it for, you have already made a profit.
Once a company’s stock is available in the stock market, it would be bought and sold regularly. There would be those who want to sell their stock for whatever reason. You can buy the stock from them. The price you buy is what is listed in the stock market. This is determined by demand. For instance, if the company is doing very well and announces a new project or a new deal, then there would be a great demand for its shares. The price of the share would shoot up and you need to pay more to buy the stocks of that company. If you already owned the company’s stock in this situation, you can sell it and earn a good profit.
However, if the company faces bad times, like disappointing business performance, or if the industry sector in general is not doing well, the price of the stock falls. The prices of stocks rise and fall constantly that is how the market works. Traders are those who keep monitoring these prices and keep buying and selling regularly to make profits. Since you are planning to invest in the stock market, you would be buying stocks for the long term. Hence, the day to day price fluctuation is immaterial for you.
2) Which stock to buy?
If you have knowledge about the financial market and are ready to put in time and effort for research, you can do it yourself. There are two tools that an investor needs. One is fundamental analysis. This is a tool that helps you analyze a stock based on factors like the economy, industry performance, company performance, and related factors. You would be using data from sources like financial reports, newspaper reports, journal reports, etc. to make an analysis. The idea here is to try to find out the strengths and weaknesses of the company. This can help you decide if a stock is worth buying.
The other tool an investor can use is technical analysis. This involves analyzing the statistical trends of a stock based on past performance. There are various tools using which you can analyze price changes and trends. Using this, you can try to decide if the stock is on an upswing or downswing, and then decide on whether you want to buy the stock or not.
There are many agencies that do fundamental analysis and technical analysis and you can refer to their reports (by paying a fee) and then decide which stocks are worth buying. If you have the knowledge, you can do the analysis on your own. Buying stocks involves risks and hence proper analysis helps you minimize risks and allows you to pick a winner.
3) Taking help of experts
If you are not the do-it-yourself type, but still want to invest in the stock market, then don’t worry! There are investment advisors who can guide you. They are professionals who know the stock market and do their own analysis. Based on the analysis, they can tell you which stocks to invest in. You would need to pay them fees for using their services. They can even manage the entire investment for you.
You must know that there is no guarantee that the recommendation of investment advisors will always be winners. That’s the reason you need to evaluate the track record of the advisors before deciding which advisor to work with. Remember – you are investing your hard earned money, so be careful whom you entrust your money with. You can also choose a robo-advisor to invest money, where a software picks stocks for you based on your investment goals. Here again, do your own analysis before deciding which robo-advisor to choose.
4) How to buy stocks?
Now that you have decided which stock to buy, the next step is to actually buy it. So, how do you buy stocks? Where do you buy it from? The answer is that you buy stocks from an exchange. The stock exchange has intermediaries known as brokers, who are registered with the exchange. You can buy stocks from a broker. The broker would have a terminal that connects directly to the exchange. The broker can carry out real-time transactions on the exchange using the terminal.
You can open a brokerage account or trading account, where you become the broker’s customer. There would be formalities for opening the account, which would include providing your details, completing documentation formalities, and you may have to link your bank account to the brokerage account. This would ensure easy financial transactions. Once your trading account is open, you can start transacting on it.
You can place an order with the broker to buy or sell a particular stock. The order can be placed over phone or you can do it online. In the earlier days, individual investors had to place orders only by phone or in person, Today, brokers offer online options to buy and sell in the stock market. Software would be available that you can use by logging in to the broker’s website or by installing it on your computer system.
When you have the online software, you would be given credentials to login to it. You can login and the software would show you stocks and their current price. Since you are not into trading, you need not worry about price fluctuations. Just place a buy order using the option provided. The quantity of the stock would be purchased and placed in your account. In this way, you can keep buying stocks and they would be added to your portfolio.
6) Going the mutual fund route
When you want to invest in the stock market, apart from buying stocks, there is one more option you can consider that is mutual funds. A mutual fund is where investors invest their money in a fund operated by a well-known company. The fund would be operated by a fund manager, someone with experience and expertise in the financial market. The fund manager uses the funds available to buy stocks. It would be the responsibility of the fund manager to analyze the market and decide where to invest money.
Instead of stocks, investors are allotted units of the fund. The value of the units would rise proportionately to the performance of the stocks owned by the funds. A good fund manager can ensure sizeable returns for investors. This is a less risky option as compared to stocks. This is because a professional fund manager does the investment and you can benefit from it. You can buy and sell mutual funds through a broker or directly with the mutual fund company.
There are various types of mutual funds. An index fund is like a replica of the stock market index. It invests in the same shares that the market index has. So its price movements are directly related to that of the stock market. There are various other types of funds available. You need to do some research on your own to understand the risk and returns of the funds before you decide which one to invest your money in. You can also ask an investment advisor to help you with this.
7) Dividend and dividend reinvestment
In the case of both stocks and mutual funds, the investor can receive dividends. The company whose stock you buy or the mutual fund company can share their profits with investors in the form of a dividend. Regular dividends can be expected from the top performing companies/funds. This can help you earn money from the stock market. There would also be an option of dividend re-investment, where instead of taking the dividend, you can choose to reinvest in. This will allow your investment to grow, so that you have a sizeable amount after some years.
8) Charges, commission, and taxes
When you invest in the stock market, you need to keep in mind that there would be various charges that need to be paid. Whenever you buy stocks, you would pay a charge or commission to the broker who is facilitating the transaction for you. This is called a brokerage and is a small percentage of the total value of the transaction. Similarly, when you sell a stock, there would be brokerage to pay. You need to consider this amount in your calculations. If you have 100,000 in your brokerage account, you will not get it all. You will get the amount minus brokerage. So, this is something you must keep in mind.
If you work with an investment advisor, they would charge either a fixed fee or a percentage of the sale in exchange for their services. This is also something for you to keep in mind. There may also be annual account charges that your broker may charge. These are things you need to know about, so you don’t get a nasty surprise later.
Then there is the taxman who is waiting to take his cut from your earnings. Taxes vary depending on local laws. When you sell the stock or mutual fund units and take out your earnings, you would need to pay taxes on it. This may be in the form of capital gains tax or income tax. This can be a sizeable amount and can reduce your overall earnings. You need to know the current tax rates and factor it. If for instance you need 100,000 for some purpose, you need to wait for your investment value to be 100,000+charges+taxes before you withdraw it.
9) Selling stocks
You can sell the stocks you own either when you need the money or when you feel you have earned a sufficient profit. When the market reaches an all-time high, you can book profits fully or partially. Later on, when the market comes down, you can invest money again in the market. You need to have investment goals when you invest in the stock market. These goals will help you decide when to sell your stocks/mutual fund units. You can also sell if you feel that the stocks are underperforming.