There are loads of money to be made in stock market. But not everyone knows how to make money in stock market in India. In the past, people have lost fortunes in the stock market. There are only handful of examples about whom we can say that they have made stock market dance to their tunes.
The performance in stocks market is very unpredictable, and this confuses majority of people. On one day one can make money in stock market, and the other day all can be lost. If you will ask me how to make money in stock market, I will say there is no set rule. This becomes specially true if we speculate in stock market.
Added to this is the fact that stock market volatility in the last few years has left investors in a state of confusion. They are in a dilemma whether to invest, hold or sell in such a scenario.
To make money from stock market it is important to know basic stock evaluation techniques. Stocks needs to be evaluated in term of its fundamental strengths and also in terms of its price valuations. In the world of internet, the information that is available about stock evaluation is huge. But here we will pick and choose the most valuable information’s that investors can use for selecting a good stocks for investing. Before booking any stock, investors must ensure that is not overvalued. All across the world majority people loose money in stock market because they purchased stocks which are overvalued.
The first step – Check stocks price short-term trend.
This can be done in variety of ways. The easiest is by looking at market price of stock. Open the price chart and see how the stock price has changed in last 6 months. Just note from where to where the price has appreciated to depreciated.
After looking at price chart we shall check the stocks simple moving averages. Note the current stocks price and its simple moving average for last 50 days.Suppose stocks current price is Rs 1735 and its SMA50 is Rs 1452, it means that stock is in rising trend.
The second step – Check how strong in the companies fundamentals
A fundamentally strong stocks exhibit variety of features based on which we can rate them as quality stock. So common features are companies liquidity of funds, profitability of company and debt levels of company. A fundamentally strong companies often shares its profit with its shareholders in form of dividends. Companies which has been paying consistent dividends to its shareholders in last 7-10 years is a sign of great fundamental. Dividend yield in the range of 2% to 3% can be treated as excellent.
The strategies used by mutual fund companies to buy or sell stocks are more intelligent than we can do it our-self. So stocks which mutual fund companies buying or selling gives a great hint about fundamental strengths of a company. If mutual fund companies are buying heavily at a certain price levels then we can safely decide to buy at that price level.
The third step – Check valuation of stocks price
We can start with checking how stock price has behaved in the last 2-3 years. Suppose in year 2007 the stock price was Rs 35 and in three years time it has climbed to Rs 50 it means the company has a growing tendency. But it is also important to check if stock price has touched overvalued levels? One can know this in variety of ways.
We can start by comparing stock price with its book value. If Price to Book Value ratio is less than 1.5, we can say that stock has not touched overvalued levels. If the book value of a stock is Rs 100 and its market price is Rs 160, it means its P/B ratio is 1.6. This is a hint that stock price has touched overvalued levels.
10 Golden Rules of Investing in Share Market
1. Avoid the herd mentality
The typical buyer's decision is usually heavily influenced by the actions of his acquaintances, neighbours or relatives. Thus, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy is bound to backfire in the long run.
No need to say that you should always avoid having the herd mentality if you don't want to lose your hard-earned money in stock markets. The world's greatest investor Warren Buffett was surely not wrong when he said, "Be fearful when others are greedy, and be greedy when others are fearful!"
2. Take informed decision
Proper research should always be undertaken before investing in stocks. But that is rarely done. Investors generally go by the name of a company or the industry they belong to. This is, however, not the right way of putting one's money into the stock market.
3. Invest in business you understand
Never invest in a stock. Invest in a business instead. And invest in a business you understand. In other words, before investing in a company, you should know what business the company is in.
4. Don't try to time the market
One thing that even Warren Buffett doesn't do is to try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares. A majority of investors, however, do just the opposite, something that financial planners have always been warning them to avoid, and thus lose their hard-earned money in the process.
"So, you should never try to time the market. In fact, nobody has ever done this successfully and consistently over multiple business or stock market cycles. Catching the tops and bottoms is a myth. It is so till today and will remain so in the future. In fact, in doing so, more people have lost far more money than people who have made money," says Anil Chopra, group CEO and director, Bajaj Capital.
5. Follow a disciplined investment approach
Historically it has been witnessed that even great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull runs.
However, the investors who put in money systematically, in the right shares and held on to their investments patiently have been seen generating outstanding returns. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind.
6. Do not let emotions cloud your judgement
Many investors have been losing money in stock markets due to their inability to control emotions, particularly fear and greed. In a bull market, the lure of quick wealth is difficult to resist. Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time. "This leads them to speculate, buy shares of unknown companies or create heavy positions in the futures segment without really understanding the risks involved," says Kapur.
Instead of creating wealth, these investors thus burn their fingers very badly the moment the sentiment in the market reverses. In a bear market, on the other hand, investors panic and sell their shares at rock-bottom prices. Thus, fear and greed are the worst emotions to feel when investing, and it is better not to be guided by them.
7. Create a broad portfolio
Diversification of portfolio across asset classes and instruments is the key factor to earn optimum returns on investments with minimum risk. Level of diversification depends on each investor's risk taking capacity.
8. Have realistic expectations
There's nothing wrong with hoping for the 'best' from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots of stocks have generated more than 50 per cent returns during the great bull run of recent years.
However, it doesn't mean that you should always expect the same kind of return from the stock markets. Therefore, when Warren Buffett says that earning more than 12 per cent in stock is pure dumb luck and you laugh at it, you're surely inviting trouble for yourself.
9. Invest only your surplus funds
If you want to take risk in a volatile market like this, then see whether you have surplus funds which you can afford to lose. It is not necessary that you will lose money in the present scenario. You investments can give you huge gains too in the months to come.
But no one can be hundred percent sure. That is why you will have to take risk. No need to say that invest only if you are flush with surplus funds.
10. Monitor rigorously
We are living in a global village. Any important event happening in any part of the world has an impact on our financial markets. Hence we need to constantly monitor our portfolio and keep affecting the desired changes in it.
If you can't review your portfolio due to time constraint or lack of knowledge, then you should take the help of a good financial planner or someone who is capable of doing that. "If you can't even do that, then stock investing is not for you. Better put your money in safe or less-risky instruments," advises Kapur.