Entering the share market may seem like a quick way to earn money for novice investors, particularly because of how digitization has simplified the process of buying and selling stocks. But making money off of stocks is far from simple and requires, at the very least, a basic understanding of the types of securities, the methods in which they generate income as well as a clearly defined strategy in dealing with them based on prevailing trends. A thorough understanding of financial and business analysis is also preferred, as it will allow you to evaluate a company or stock and decide whether or not investing in it is a good bet. As a result, some investors may prefer to solicit the advice of brokers and traders who act as intermediaries and are well trained in the ins and outs of the market.
The market itself is divided into two categories- the primary and secondary markets. Securities are issued and listed on various exchanges in the primary market after which trading between investors and the markets takes place in the secondary market. Securities are financial instruments traded on the share market, that hold some form of economic value and represent agreements between investors and companies.
There are various types of securities, but the ones more pertinent to this discussion are equity securities such as common stock and debt securities such as bonds.
Once purchased, they can generate wealth for an investor in a number of ways :
- – Capital Gains : Capital gains represent the increase in value of a security after the time of purchase. Most types of securities can yield capital gains, though they are generally associated with equity securities. What Capital Gain essentially is, is an increase in the value of a purchased asset and is realized when that asset is sold for a profit. In the context of the stock market, this is gauged by the increase in value of share prices. While capital gains can yield high returns, they are a double edged sword and can also cause heavy losses if the price of shares drops rapidly.
- – Dividends : They represent direct monetary returns on investments that are paid out by organizations to shareholders periodically. This is generally done from the company’s income after setting aside funds for working capital and other ventures such as expansion. Dividends are not paid out by all stocks and only larger enterprises pay out regular dividends. Yields can vary based on profitability and interest rates as well as the type of security involved.
- – Interest : This type of return is only applicable to non equity securities and is in the form of remuneration for the money loaned to entities through debt instruments. The rate of return is generally fixed but can be altered with respect to the terms of the agreement.
Principles for Making Money on the Stock Market
While there isn’t any one definitive answer to the question of how to make money in the share market, there are a few, widely respected principles that can be followed to improve one’s chances of positive returns :
- – Understanding your investments : Selecting the right stocks requires a great deal of knowledge across a variety of fields. Having a thorough knowledge of the types of agreements involved, the factors influencing share prices, the workings of the company of interest as well as larger factors such as prevailing economic conditions is essential before deciding how much you have to invest in stocks.
- Knowing your investment in and out is an essential first step. The websites of companies and exchanges are a good place to start. Looking at a company’s balance sheets which are often available online is a means to stay well informed, with good numbers and relatively low valuations with respect to peers acting as indicators of a promising potential investment. This is why it is often said that one should invest in the business, not the stock.
- – Knowing when to quit : Every investor’s dream is to buy when prices are low and sell when they peak, however realistically this isn’t usually the case. Stocks are a volatile investment and while they can stabilise for periods, they may also rise and fall regularly. Deciding to liquidate an investment after periods of good returns may be a better choice rather than waiting for them to peak as there is always a risk of things going south.
- – Building a diverse portfolio : Investing funds in a variety of securities across many sectors is a good method of compensating for potential losses in one area. Hedging is a common method of achieving this by investing in competing organizations so that losses sustained from one are offset by the gains achieved by the other. In the end, it is all about building an investment portfolio where the overall gains are not dependent on a few of the investments. Large cap stock enterprises are a good source of steady returns while mid caps may or may not yield high gains. Small cap shares enterprises should only form a small part of your portfolio as, despite potentially high yields, they are a greater risk in the long run.
- – Avoiding the herd : Make conclusions based on your own research rather than following speculative information and opinions of a majority. Stock prices may rise and fall as demand varies and investing in trending shares may not be a clear indicator of how to make money in the share market.
Therefore, if one thing should be clear by now, is that it is absolutely essential to do your homework. At the very least, you should solicit the advice of a professional before committing oneself to any sort of investment, particularly if you’re new to the game. As mentioned earlier, there isn’t one single cut and dry method on how to make money in stocks but careful observation, industry knowledge and strong investing principles are as strong a foundation to start with as one can hope for.