Are you one of those traders who bought stocks on someone else's advice and waited months and years to recoup the cost? According to experts, trading in the stock market can be pretty risky, but one can act smart to make money fast. Traders, who are new to trading, are always wondering how to make money in the stock markets? Investing in stocks is one of the greatest steps you can take to build your wealth. It's like earning while sleeping. Because the companies in which you have invested your money are working for you.
To make money on the stock market, you need to give your investments time to grow and appreciate their value while making sure you diversify your holdings and invest regularly.
How does the stock market work?
It is as easy as a high school economics class. It's about supply and demand and how those factors affect value. First of all, you will need a brokerage account before you can start investing. Thanks to digitalization, it only takes about 15 minutes now to get one.
As an investor, you can buy market assets such as stocks (shares of the company), which may increase in value. The market price of a share can rise due to several favourables, for instance, strong financials, robust and reputed management, reduction in debt, significant alliance or grabbing critical order, future investment and expansion plans, rich cash flow and more. As the value of the share increases, more and more investors want a slice of the pie and are willing to pay more for a single claim.
This means that the price you paid has now increased because of more appeal. It implies that you can make money when it comes time to sell it.
To make money in stocks, stay invested.
More time in the market gives you more opportunities for your investments to grow. The companies have more time to show their performance and growth, and hence, investors get rewarded in the form of appreciated stock value. This higher price translates into a return for the investors who own the shares.
If you have invested for the long-term, you can claim the dividends when the company decides to pay. However, if you are into intra-day trading or shell-off your shares before the payout, you miss these earnings.
There are two main ways to make money from stocks
1. Capital appreciation gains
By investing in stocks, you can expect to gain through capital appreciation. This is when your invested capital increases over time due to market movements that are triggered by a number of reasons mentioned above. The capital gain can be multifold. Historically, the largest increase in the stock market occurred on March 15, 1933. On this day, Dow Jones Industrial reported a whopping 15.34% increase in a single day. However, there is no guarantee of capital appreciation. The probability that market prices can go below the purchase price always exists.
2. Dividend gains
In addition, you can earn dividends if the company decides to distribute a share of profits as a dividend to its investors. In most cases, the business partially distributes the profits and keeps the rest for other purposes, such as expansion. Dividends get distributed per share.
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Diversify your portfolio
They say that you should not keep all your eggs in one basket! This idiom is perfect to understand why diversification is crucial when it comes to investing in stocks. Investing in one stock, industry, or index makes you prone and vulnerable to various risks. On the contrary, you can minimize the risk by investing in different sectors and stocks. For instance, if you wish to invest INR 1,00,000 and invest it in one stock, you will be at a gaining end if the prices go up. However, if the price of the stock goes down, say due to macro factors or bad financials, an unanticipated event/accident with a company, or just a change in the emotions of the market, your whole portfolio can come down crashing. This can be even if you diversify, but the impact will be less severe. It is because the general market risks are the same for all the stocks. Hence, to minimize the risk further, it is advisable to diversify into different asset classes and financial instruments like bonds, real estate, commodities, mutual funds etc.
Take professional help
Like any other business, in the stock market trading as well, you should consider taking assistance and services from the professionals. You may be following the market regularly, but it's always advisable to consider the calls and tips the expert advisory services offer. Although, the decision in investing any stock or asset should be your individual call. The benefit of having a financial advisor is that he will customize his services as per your risk appetite, capital, goal and investment portfolio. They typically charge a fee based on the percentage of earnings or a fixed price.
If you want to make money on stocks, you don't have to spend your days speculating on individual company stocks that might go up or down in the short term. While most traders do that at their own risk and intra-day trading is thus popular. However, it's advisable for beginners to invest for the long term. Even the most successful investors like Warren Buffett have acknowledged the power of long-term investments. Hence, investing instead of trading is the key if you want to play safe.