How do you make money on the stock market? How soon should you sell your shares? Are the sheer volumes of trades that happen every single day making you wonder if you aren’t doing enough? Is it good not to trade sometimes? Here are answers to some of your questions, in our feature on day trading.
The equity or stock market yields the highest return if stocks are held for a long enough period. The second part is what the media fail to emphasize while screaming from the roof tops about how people are making money in the stock market. And it’s ignorance of this fact that causes people to invest blindly and lose their hard-earned wealth.
Here are some useful pieces of information to help you understand trading and shares better. Also, some tips to invest safely in shares, while maximizing your returns.
When you buy a share, you become one of the owners of the company: What people forget when they buy a stock is that they are now a part of this business and, just as in any business they will have to share both profits and losses. When the company makes a profit, you earn a share of its profits. If the company is in for a loss, you too will lose your money. This makes investing in shares risky, but there’s no way out of it.
The price of a share can vary in the short term: When the company issues a share, it has a face value. Once the stock is traded, its value either goes up or comes down, depending on its demand and supply in the market. This value is called the share price. When there is a big demand for a share, its price goes up, and vice-versa. When the media report that the stock market has gone up or down, it is the share prices of the stocks available in the market that have moved. As an investor you should not lose heart. The share prices of good companies will always go up.
Be a long-term investor: Buying low and selling high is the best way to make money in the stock market. Buy shares in the bear market, when share prices have gone down. Sell in the bull market when the Sensex is going up and so are the share prices. It’s impossible to predict the direction in which the market will go. Hence, when you invest, you must stay for a long time in the market. As companies increase their sales and make more profits, their share prices will rise. Meanwhile, keep selling only a small number of shares at frequent intervals and book profits if you think you are getting a good price.
Decide on the amount you can risk losing: Never forget the fact that anything that gives you higher returns also carries a significant amount of risk. So invest only that amount which you can risk losing. If you are young, have no dependants and liabilities and have a regular job, you can invest a sizeable amount in shares. If, however, you are nearing retirement or have debts or dependants, minimize your exposure to stocks.
Beware of ‘hot’ tips: Avoid buying shares of unfamiliar and unknown companies. Stay away from ‘hot tips’ given by brokers – they usually turn cold by the time they reach you. Research the stock yourself. Read the audited profit and loss statement of the company. It can give you a wealth of information about the future prospects of the company. Understand terms such as Earnings per Share (EPS) and Price/Earnings Ratio (PE).
As defined by Investopedia.com – The Investing Education Site:
EPS: “The portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability.”
PE: “A valuation ratio of a company’s current share price compared to its per-share earnings.”
Invest in a top-performing diversified equity mutual fund: If you are apprehensive of the risks of the stock market, invest through a well-performing diversified equity mutual fund. This fund is headed by a fund manager who does all the research for you. It’s a safe bet.
Any experiences in the stock market you’d like to share with us? Any insights for prospective investors? Do write and tell us.
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