How to earn money from stock market
Every investor wants to make money instocks, irrespective of the level of experience. It is easy to fall for the temptation, but one needs to have a good strategy in place to be able to protect one’s money and make handsome returns.
Investing in the stock market is simple, but not easy. It requires passion, patience and discipline. Plus, one needs to have a sound understanding of the market and the forces at work and also some bit of research capability.
Although there is no sure-shot formula or one-size-fits-all solution for success in the stock market, there are some broad guidelines, which if followed prudently can increase your chances of making a decent profit.
Do your homework
“If you do not study any company, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards,” said Peter Lynch, a globally-renowned fund manager.
Lynch says you should only invest in what you know and take the time to learn about what you don’t.
Dinesh Rohira, CEO & Founder of 5nance, an online financial planning portal, says there are no shortcuts to make money in the stock market.
“It is imperative to do thorough research with a considerable amount of patients. It will be sensible to invest in a company which is easy to understand with a sustainable business moat,” he said.
Invest in business
An individual should always invest in a business instead of simply looking at the stock price. Abhimanyu Sofat, Head of Research at IIFL Securities, says: “Understanding a business will help one analyse the future prospects of a company and help make better investment decisions.”
For example, Warren Buffet’s primary investment philosophy is to invest in businesses that he understands. He invested around $1 billion in Coca-Cola in 1988 earning around 10 per cent return CAGR in next 30 years.
Avoid herd mentality
The decision to buy or sell a stock should not depend on what your friends or relatives say. An individual should not invest in a particular stock simply because people around him are investing in it. This may not yield good returns and one may end up with heavy losses in the long run. Consider the case of the Reliance Power IPO, which had received an overwhelming response from retail investors. The retail portion was oversubscribed 14.4 times. The company got 19.5 lakh applications from retail investors. The IPO was issued at Rs 450, and retail investors got a discount of Rs 20 per share. The stock today trades at Rs 30 (post bonus). This shows the kind of wealth erosion retail investors must have suffered.
Invest with a disciplined approach
It is always prudent to invest systematically and with patience in the right shares or funds. As the stock market is always volatile, an investor should be ready to absorb calculated risk and decide a necessary course of action like hedging against underlying stocks.
Says Waqar Naqvi, CEO, Taurus Mutual Fund, having patience and a disciplined approach can help take the right decision, but one should think of the long-term picture.
Have a broad portfolio
By diversifying a portfolio across asset classes, you can help earn optimum returns with minimum risk. The kind and level of diversification can vary from investor to investor, and it can help cope up with volatility, something that is part and parcel of stock market.
“It is always advisable to diversify a portfolio across asset classes, as it can help minimise risks. The extent of diversification would depend on the investor’s preference,” said Sofat.
Have realistic expectations
One should always have realistic assumptions. The equity market tends to deliver returns in spurts. It is known to test investor’s patience all the time.
“No asset-class can give abnormally high returns for a very long time. Mean-reversion is the law of nature. Unrealistic expectations always lead to wrong decisions,” says Naqvi of Taurus Mutual Fund.
Stock market offers opportunity to enter and exit at regular intervals. Therefore, it is appropriate to keep some cash, instead of investing all of it. Corrections offer opportunity to enter a stock at a lower level, which can help make decent returns on trend reversal.
Invest only surplus funds
An investor should only invest surplus funds, or money s/he doesn’t need in the short to medium term, in stocks. Since the equity market is volatile, there is always a risk of temporary loss/drawdown.
In the words of Sir John Templeton, the global market guru, the four most dangerous words in investing are: “This time it’s different.”
The stock market moves in cycles, and it requires domain expertise and right temperament to understand how a trend changes.
Rigorous monitoring is a must
Investing in the stock market requires regular tracking of news and company-related events, which may impact the stock price.
For example, the recent news of increasing the axle load limit of commercial vehicles had a negative impact on the share price of Ashok Leyland. Similarly, good earnings can have a positive impact on stock price.
How to earn money from stocks?
The ways mentioned above can motivate you to start investing in stocks. But the momentum of the market can be very confusing at times, without giving any scope for actionable strategy.
Like in the current scenario, the equity benchmark Sensex is hovering around its lifetime high, but most stocks are in the negative trajectory on a year-to-date basis.
When in a confusing state, one should never hesitate to take help of professional advisers for managing your portfolio.
Investing in quality stocks for the long run always works. The BSE Sensex has advanced 16 per cent annually in last 15 years, whereas shares of companies like Symphony, Borosil Glass Works, Mayur Uniquoters, TTK Presige and Bajaj Finance have delivered annualised returns of over 50 per cent during this period.
Timely exit is important. Remember, a penny saved is a penny earned. If you believe the environment is getting tough for a certain business, you should not shy away from exiting your positions.
For instance, shares of Moser Baer India plunged to trade around Rs 2 in July 2018 from over Rs 110 in July 2003. Mahanagar Telephone India Nigam (MTNL) declined to Rs 15 from Rs 105 in the same period.
If you do not have the skills to select the right stock, then take help of professional investment managers, who are experienced and have a solid track record.
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