Investing in the stock market is a great approach to get the growth you desire. First, you should learn How to Start Investing in the stock market. Set your financial goals and begin investing in various investment products. You must also decide how long you want to maintain your investment in a certain stock.
To invest well over a lifetime, you don’t need a high IQ, a top-tier finance school, or insider information. What is required is a fundamental understanding of how the stock market works, a method for locating solid firms to invest in, and the capacity to resist emotions from sabotaging your strategy.
Follow these steps to know how to start investing in the Stock market
The important points are as follows:
- CFDs vs. stock trading
- Find a reputable broker.
- Purchase stocks
- Fundamental and Technical Analysis
- Psychology of Money Management
- Investing Alternatives
- Expectations
- Continue to learn
CFDs vs. stock trading
CFD trading and share trading are two distinct methods of investing in the stock market. When you buy shares of a company, you are purchasing ownership of a portion of the firm. This means that you will not only benefit from any price increases, but you will also receive dividends, which are a portion of the profits a company makes if the company pays any. This is the most common technique to invest in the stock market.
CFD, which stands for Contract For Difference, is an alternate solution. CFDs are contracts that you can open to bet on the direction of a stock’s price. You are simply betting against your broker or other traders; you do not own any stock in the company.
Some traders prefer CFDs because they allow you to use “leverage,” which can increase your profits if you are correct about the market’s direction, but it can also increase your losses if you are wrong, and because CFDs allow you to open a “short position,” which means you can bet on the price of a stock falling.
These two properties of CFDs make them a tempting option for short-term traders, but not for long-term investors intending to buy and retain stocks.
The cost of holding a stake overnight with CFDs is often expressed as “financing” or “overnight rollover.”
So, if you intend to hold a stock in your portfolio for months or years, you don’t want to pay a commission to your broker on a daily basis. Furthermore, certain brokers may have bigger spreads for CFDs than for stock trading.
So, if you want to invest over time, share trading is the way to go.
Locate a reputable broker
First and foremost, you should ensure that your broker is regulated by a recognised national institute with jurisdiction over financial services. This usually ensures that the broker is reputable and that your money is safe because most of these regulating bodies also offer a system to reimburse your money up to a certain level in the event of bankruptcy or other illegal financial irregularities by your broker.
It’s fine to choose a broker regulated in a country other than your own; just make sure it’s regulated by a reputable financial institution, such as the FCA in the United Kingdom, SEBI in India…etc.
There are other factors to consider, such as domicile, trading platform, customer service, and so on. Spread and commissions are two of the most significant.
You’ll want to keep transaction fees as low as possible in order to maximise your potential returns, so look for a broker with cheap commissions.
I use Upstox for myself. It is licenced by the SEBI(Securities and Exchange Board of India), has no commissions, a 500 rs minimum investment, and allows you to purchase fractional shares.
Purchase stocks
We’ve arrived at the exciting part. What stocks should you invest in?
Stock is more than just a symbol on your screen; it is an ownership stake in a real firm.
Consider a store that you visit. Perhaps a coffee shop where you can relax for 20 minutes and have a cup of coffee.
Assume the owner approaches your table and says, “Hey, we’re trying to improve our business, so we’re seeking investors who will lend us some money to fund our projects.” “Would you like to put 8000 INR into our company?”
Let’s say you say yes for whatever reason.
You now own a piece of that coffee business, a “share.” If the company expands, so will your stake.
Assume that your share is worth INR 16000 after a year. You can sell it for a total profit of INR 8000.
The stock market is a location where thousands of enterprises, like that modest coffee shop, are looking for investors to finance their projects.
We’re talking about Amazon, Google, Netflix, Microsoft, Apple, Visa, Mastercard, Starbucks, Facebook (Meta), Airbnb, Coca-Cola, and other firms whose products you’ve most likely used at some point in your life.
Assume you enjoy Apple products. You can acquire a piece of the corporation by purchasing its shares. If the company expands, your investment expands as well.
So what stocks should you buy?
I know some folks who invest in every firm they come across.
Do you know Apple? Let’s go ahead and buy some stocks.
Amazon? Without a doubt!
Netflix? Let’s also include some Netflix stocks in our portfolio!
Don’t purchase everything you see
“What stocks would you buy if you could only make 10 investments in your entire life?” is a question that may help you be more selective in the stocks you include in your portfolio.”
If you could only buy ten stocks, you would definitely focus on select companies that can prosper over time and spend more effort researching those companies rather than buying each stock you saw on your broker’s platform.
We only need to answer two simple questions
- Where do we look for good firms to invest in?
- How can we know what a good purchase price is?
First and foremost, what is more important? Is it an excellent company or a low price? They are both vital, but which comes first?
Benjamin Graham, the “father of value investing” and a Columbia professor, believed that obtaining a decent price is more important. As a result, he used to invest in any stock that could be considered a “deal.”
Despite being a student of Benjamin Graham and adopting many of his notions, Warren Buffett adopted a distinct methodology, more akin to that of John Maynard Keynes.
He begins by researching the companies and seeks out good firms to invest in rather than good stocks. Then he assesses the pricing after he finds a nice one and waits if the price is inconvenient based on his analysis. It can take up to two or three years for a substantial market downturn to occur, at which point the price of a stock can be discounted. Warren Buffett is usually at the bottom of the downturn, waiting for opportunities to buy the companies he is interested in.
Find reputable Companies
We’ll look at two distinct methods of analysis later, but I believe you may start making a list of probable stocks to buy with two basic approaches. If you want to learn how to start investing then you must learn to find a reputed company.
The first method is what I refer to as the “I don’t know and I don’t care” attitude.
Typically, new investors’ initial step is to try to identify the next Amazon or Microsoft. That is understandable. You missed out on buying the original Amazon or Microsoft, so you’re looking for a new one that you can buy for a few dollars per share and gain many dozen times your investment.
So, which companies will become the next Amazon or Microsoft?
“I don’t know and I don’t care,” you should say.
Don’t try to acquire the next Amazon or Microsoft. Even specialists frequently fail in this endeavour, let alone a newbie.
You should include these companies in your portfolio only when they are large enough to warrant ownership.
Many newcomers make the mistake of focusing on cheap stocks because they appear to have greater growth potential.
Would you rather buy a stock that costs INR 100 per share or one that costs INR 25000 per share? What if the first company experiences quarterly losses while the second grow its earnings at a sustainable rate?
In the stock market, INR 100 is not always less expensive than INR 25000. The 25000INR stock may be far easier to double in value than the INR 100 stock.
“Have you ever heard of this company?” It will be the new Tesla!” .“I’m not sure, and I’m not interested.”
The second strategy
The second strategy is to start noticing brands when you enter a store.
“What brand do I definitely expect to see here in this shop?” ask yourself.
For example, suppose you go into a 7-Eleven or another convenience store to get some food. What brand do you anticipate seeing? If you were to ask me, I would expect to see Coca-Cola. I can’t picture a convenience store without Coca-Cola.
What brand do you expect to see if you go to a pharmacy? Fortunately, I don’t visit pharmacies too much, but Cipla is something I expect every pharmacy to stock.
Are Cipla and Coca-Cola likely to last another 20-30 years? Is it conceivable that they will maintain their brand power and make profits? If you said yes, you already have two firms to add to your list. I’m sure you can find many other potential stocks to invest in.
Find a good deal
Getting a decent deal on a stock is critical.
Even if you overpay for stocks in a good firm, you can still make money. However, if you buy stocks in a solid company at a decent price, you can make even more money.
Here we have Axis Bank Share.
If you had purchased at the first point, you would have paid INR 600.
If you had purchased at the second point, the price would have been INR750.
Although it may appear to be a trivial distinction, it is not.
Consider the current pricing, which is somewhat higher than INR 780.
You made a 20% profit by increasing your investment from INR 600 to INR750.
So, receiving a decent price for the shares can substantially enhance your profitability, but keep in mind that in both circumstances, you might have had a profitable investment by choosing a good firm to invest in.
Fundamental and Technical Analysis
Technical and fundamental analysis are two methods for determining a fair purchase price. The study of historical prices on charts is known as technical analysis, and it is used to determine price trends and patterns.
Fundamental analysis is founded on the concept that a stock price does not always reflect the true intrinsic value of the underlying firm, and it gives a collection of tools to help you determine whether a company is undervalued or not. If you want to learn how to start investing then you must learn how to analyse a share.
Let’s analyse ICICI Bank Chart.
I’m going to draw a 100-period exponential Moving Average (EMA) on the chart. We buy whenever the price falls below it.
You had four chances to acquire ICICI Bank shares in the last three years.
Given the present pricing, all of these would have been profitable investments.
This is a simple way to try to acquire a decent price for your stocks. I’m not going to claim that this is the best approach available, but it’s really simple to use and suitable for complete beginners.
There are two types of fundamental analysis
- Quantitative analysis
- Qualitative analysis.
The latter is the examination of unquantifiable benefits and drawbacks that everyone can see have an impact on the firm.
Management or industry trends are examples of this.
The financial accounts of the corporation are the focus of quantitative analysis.
Financial statements are classified into three types
- Balance sheet
- Income statement
- Cash flow statement.
The balance sheet shows the company’s assets and liabilities, as well as shareholder equity.
An asset is anything that a firm owns that has a quantifiable value and can be sold for money.
A liability is anything that a firm owes and must repay.
The value of the corporation is determined by its shareholders’ equity. It is computed as total assets minus total liabilities, and it reflects how much money the shareholders would receive if all assets were liquidated and all liabilities were paid.
The income statement is the second financial statement, in which you may read revenues and expenses, indicating how the company makes and spends money.
Simply removing the company’s costs from its sales or revenues yields net income or earnings, allowing you to determine whether the company is profitable.
The cash flow statement is the final financial statement. This demonstrates how the company spends its funds to run the business. It also displays how much money is borrowed from banks or issued in the form of bonds.
Another crucial assumption is that a corporation with a lot of capital is less likely to go bankrupt during hard times.
Money Management
How much money should you put aside and how many stocks should you purchase? How can you maximise your return while minimising your risk?
Money management is a discipline that addresses all of these concerns. If you want to learn how to start investing then you must learn money management.
Money management methods, in my opinion, are the most crucial aspect of trading and investing.
This is an example of a simulation based on one of my strategies. I won’t go into detail, but it’s easy to understand how I’d wind up losing all of my money if I risked 5% or, worse, 10% per investment. I would have a lucrative portfolio if I had balanced risk management of 1% per investment or 0.20%.
This is referred to as “risk of ruin” in finance.
Example:
Let me ask you a question:
“How much do you need to make to compensate for your losses?” How much money do you need to produce to make up for a 20% loss?”
This may appear to be a stupid question, and you may say, “Well, I lost 20%, so I have to generate a 20% profit to recover.”
Unfortunately, that is not the case, and the right answer is 25%.
Let’s start with the numbers. You start with INR 1,00,000 and lose 20%, or 20,000INR. You now have INR 80,000. If you make a 20% profit on 80,000, it is INR16,000, which will bring your account to INR96,000, not INR 1,00,000.
A 25% profit is required.
25% of INR80,000 equals INR 20,000, bringing your account back up to INR1,00,000.
The higher the profit percentage required to recoup your losses, the more money you will lose.
If you lose 25%, you need to gain 33% to break even.
And For 50%, you must perform at +100% to recover your losses.
And If by By chance you lose 80%, you need +400% to restore what you lost, making it extremely difficult to recoup after such a large loss.
So the first step is to avoid high-risk situations.
Ideas for you to keep your portfolio somewhat safe
Only dedicate 20% to 80% of your budget to stock purchases; save some money each month to acquire more equities.
Let’s imagine you wish to invest INR 10,00,000 in the first point.
Should you invest it all at once? No, you should put up INR 2,00,000 to INR 8,00,000 and keep the remainder in cash.
Why is this the case? Because the market crashes from time to time.
The S&P 500 is a market index that includes 500 of the top publicly traded firms in the United States. If we use it as a baseline, we can claim that the market falls by 10% or more once every 21 months on average.
It drops by 20% or more every 9 years.
Almost every year, there are 5 to 10% decreases.
While most individuals panic at these times, you may take a more calculated approach. When most equities are highly discounted due to a market meltdown, you could have some cash ready to invest in the stock market.
I understand that the 20% to 80% range is somewhat large. If you believe that prices are extremely high, you should keep more cash and allocate closer to 20%. It also relies on your risk tolerance. If you don’t like taking risks, you might choose to invest a small portion of your money in stocks.
If you want to learn how to start investing perfectly then you must learn to keep your portfolio safe.
Dollar-cost averaging
You can save money every month to buy new stocks or more of the stocks you already hold.
If you invest INR 10,00,000 now and make INR 25,000 monthly instalments into your broker’s account, with an annual return of 14%, you will be a millionaire in 25 years.
Is INR 10,00,000 too much for you? Or maybe you cannot add INR 25,000 every month? Or 14% per year sound like a very high return?
Well, let’s try this.
If you invest INR5,00,000 today, making additional deposits of INR 3000 each month into your broker’s account, with an annual return of 10%, you would have INR1,00,00,000 in 25 years.
Psychology
If you asked me for two secrets to being a successful investor, I would reply with patience and self-discipline.
Examine the charts I provided above: Axis Bank and Icici Bank are just a few examples.
How many times could you have panicked and sold the stock at the first sign of a decline? How many times would you have been incorrect? 30 out of 31 times!
Emotional stability is required for investing. If you withdraw your funds every time the market falls or you believe it is too high, you are unlikely to be a profitable investor.
So, when is the best time to sell?
Keep in mind that you have purchased stock in a company.
Assume you’ve opened your own restaurant and things are going swimmingly. You are making big profits every month, and there appears to be no reason to believe that this will continue in the future. Would you sell your restaurant because you were making a good profit? I’m confident you wouldn’t. So, why would you sell your stock when things are going well and there is no reason to believe that they will continue in the future?
Treat your stocks as though they were your own company. Keep up with what’s going on in the company and in the industry. Sell if you need the money or if you no longer desire the business.
Don’t make the psychological error of selling every time the stock has a terrible day or sets a new high.
There is a lot more to say on this subject. I’ll only advise this: don’t underestimate the power of your emotions on your assets.
Investing Alternatives
Individual stock selection takes time and a certain amount of market knowledge.
If you are not interested in studying or do not have the time, you may want to consider some other ways to participate in the stock market.
The most common methods are ETFs and Mutual Funds.
The popularity of Robo-Advisors has risen dramatically in recent years. Robo-advisors are digital platforms that use algorithms to deliver automated financial planning services with little or no human supervision.
Financial advisors, investment managers, and data scientists create these algorithms, which are then written in software by programmers.
A typical Robo-advisor collects information about their client’s financial situations and future aspirations via an online survey, and then uses the data to offer advice and automatically invest for their clients.
Management expenditures are often less than 0.5% per year because they require little or no human oversight.
Expectations
Markets have had excellent years in 2021 and 2022.
Almost all of the equities that survived the March 2020 crisis have maintained a robust and prolonged rally. The same thing happened with Bitcoin and other cryptocurrencies.
This circumstance has led many first-time investors to throw their money into the game, proclaim themselves “experts,” and begin giving advice to others via YouTube channels, Telegram groups, and other platforms, claiming to achieve huge profits that simply cannot be sustained in the long run.
Consider two locations that are 130 miles apart to illustrate why temporarily high returns do not indicate anything. I can drive that distance in 2 hours if I stick to the 65-mph speed limit. However, if I drive at 130 mph, I can arrive in one hour.
Is it “right” if I do this and succeed? Should you be enticed to attempt it because you heard me say it “worked”?
These “experts” who claim to generate large profits are much the same. It works in short streaks as long as your luck holds up. It will eventually kill you.
So, if you see someone claiming to double their investment every quarter, congratulate them, but keep your expectations realistic for your investments.
Continue to learn
You’d be surprised at the results you could get if you only spent two hours a week studying the stock market.
You may check the charts and read the latest news about the firms in your portfolio while spending the rest of your time learning about finance.
NOTE: If you’ve never invested money before, it may seem intimidating. To make wise financial decisions that will benefit you for years to come, you must first determine how you want to invest, how much money you should invest, and how much risk you can tolerate.
I wish you the best of luck with your investing career!