Investing is a way of making money from money. Investing money works for you. either you work or not money will always work for you. It helps you gain multiple returns.
Anyone who is rich has become rich by investing their money.
The share market is also that type of investing. So, learning how to invest in the share market is very important.
If you will compare the 30-year period of investing you will find that stocks have outperformed all other investment options. The stock market has great potential.
In this article, I will share with you how to invest in the stock market.
Many people find investing so confusing that they never invest in the share market.
Investing is not an easy task; you have to work hard to learn stock market investing.
Investing in the stock market requires patience and discipline.
To invest in the stock market you need two things:
- Demat and trading account
- A good Stocks to invest in
To open a Demat and Trading account you have to find a broker. You can open your Demat and Trading Account with a bank or you can open with an online broker.
To open Demat account you need some documents like:
- PAN card is mandatory
- Aadhar card
- Bank statement/ Cancel cheque
- Passport size photo
Your account will open completely online.
At the time of opening a Demat account with any broker, you have to keep these things in mind.
- Their account opening and brokerage charge
- Trading platform
- Customer support
- Mobile application
- Annual maintenance charges
- Is there some hidden charges that you are not aware of
Once your Demat account has open now you are ready to invest in the share market.
Ways to invest in the share market
There are two ways to invest in the stock market.
- Direct investment
- Indirect investment
In the direct investments, you do your own research and the buy shares. The benefits of direct investment are that you are responsible for your money. You are not dependent on anyone.
In an indirect investment, you give your money to someone else to do investing for you. In return, they will charge a fee. They are qualified individuals to invest money. A mutual fund is an example of such an indirect investment. In indirect investment you don’t have to do any work, you have just credit money into your mutual fund account. They will take care of the rest.
Which is the best? Direct or Indirect investment
If you are a No-Nothing investor then indirect investments are good for you. No-Nothing investors are those investors who want to invest in the stock market but do not have time to research stocks. They are busy doing their jobs.
If you are a young investor, and you have time and energy to do research then the direct investment is best for you. Those who invest their own money have an advantage over those who give their money to someone else.
A study shows that most of the mutual funds never best the market. They give below-average returns.
Two different approaches to the stock market
There are two types to people in the stock market.
Both investors and traders buy and sell stocks in the market to make profits. But the difference lies in their approach.
Investors are those who buy and hold stocks for the long term. Investors are those who calculate what a stock is worth based on the value of is businesses.
Traders are those who try to make a profit from the ups and downs of the stock price for a very short period of time. Traders try to make predictions based on the trends and charts of the stocks.
Which is best? Trader or Investor
Both are ways to makes profits form the stock market. So it is not easy to judge which is best. It’s all up to you to decide who you want to become. But it good to know the consequences of both investing and trading.
Frequent buy and sell cost your brokerage, either you make money or lose money your brokerage will always make money.
Trading is gambling. A trader gambles that a stock will go up in price because somebody else pays even more for it.
People who invest make money for themselves; people who trade make money for their trader.
You can never predict the market in the short run. And traders always try to predict the market.
Also read: Difference between Investing andTrading
Find good business to invest in the share market
Researching stocks is a very difficult task. Especially when you know nothing about the stock market. There are various parameters to find good business.
These are some of the questions you should ask yourself before investing in any company.
What does the company do?
What makes this company grow?
Do this business is simple and understandable?
Where does its profit come from?
Does the company have a worthwhile profit margin?
Does the company have long-term prospects?
Do the businesses are selling at a cheap price?
Does the company have good quality management?
These questions will help you find good businesses.
Fundamental research of any stock can tell you how the company is fundamental.
To research any stock, fundamental analysis is very important.
To understand the fundamentals of any company basic accounting is very important.
WARREN BUFFET said
“Accounting is the language of the business.”
To become is investor you have to learn to account. Accounting helps you to read the Financial statement of any company.
You can get a financial statement of any from their annual report. You can download the Annual report of any company form their websites.
Characteristics of a businesses
1. Quality of business
To find a business with great fundamentals are very important. Companies with great quality perform great in the stock market.
There are many accounting terms and ratios which will help you find the quality of business.
1 Return on equity (ROE)
Return on equity is a very important parameter to assess the quality of any stocks.
ROE tells you how much money you are going to make on your investment.
You should look for the company which have higher ROE
2 Low debt
A company with low debt performs well in the market. The debt of any company is determined by the Debt to equity ratio.
D/E ratio is used to discuss the risk of the company. So, Debt to equity ratio is lower the better.
In ROE and D/E ratio, first look for the debt of the company, if the debt of the company is higher then it is not advisable to look further for ROE.
Better choose the stocks whose debt to equity ratio is less than 0.5.
2. Growth of the business
You always invest in a company which has the potential to grow. Growth stock will give you a higher return.
It is difficult to find a business in its early growing years, It requires lots of research. Every growing company has a story behind its success.
You can only predict the further growth of any company by calculating its past growth rate.
You can find growth stocks by seeing it’s:
1. Profit growth
This will show you how much profit the company has made in the past.
2. Book value growth
Book value growth is a very important parameter you can check for. Stable growth in book value is a good sign for any Stocks.
3. Sales growth
The sales growth of any company will tell you how much revenue the company had made in the last years. Is there is a decrease or increase in revenue?
3. Long-term prospects
Would you like to invest in the company that is going to shut next year?
Of Couse not! I will invest in the company that can survive the next 10 to 20 years.
You should always look for a business that has a long tern prospect.
The company which has long term prospect has always persistence product.
Look for the businesses you believe will be there for the next 10 years.
4. Quality of its management
It is the management who runs the company. Management should always work in the interest of shareholders. Because shareholders are the owners of the company.
But in this competitive world, everyone wants to make money for themselves.
So, It is very important that the management should be honest and competent. If the management of the company is good then bad companies will also become good in the long run.
It is very difficult to determine the quality of the management because not everyone has access to management.
But you can analyze the management by its decision which can be seen in financial statement of the company
You can evaluate the management by followings terms:
1. Promotors Shareholdings
If promotor holding is more, means promotors have faith in the company. Look for the company which has high promotor shareholdings.
2. Dividend and tax history
The company that pays regular dividends considered as good company. Management of the company decides how much dividend is paid to the shareholders.
Taxes for any organization is a big expanse. Good management pays regular taxes.
5. Competitive Advantages
Competitive advantage tells us that how one company differ from other company. When you are researching stock you much look for moat in the businesses.
Moat can be anything for a business
- A strong brand identity
- Low cost of the product
- High switching cost
- A unique intangible asset such as brand
- Good customer support