Are you planning to start investing in stocks?
Traditionally, investing in stocks have yielded one of the highest returns.
Historical evidence supports that it is one of the best ways to build long-term wealth.
If you study the Forbes list, almost every second person has amassed wealth through stocks.
The stocks have been one of the biggest channels for wealth creation.
But you must also remember that investing in stocks is a tricky business too.
You have to understand the markets closely and decide what stocks in to invest in.
On the one hand, you have to create an investment objective.
On the other hand, you will have to keep track of your valuation outlook as well.
Different stocks embody different types of return prospects.
Just like the profile of investors, it keeps changing significantly.
Every stock represents a certain amount of value, but it depends on the type of returns you are expecting.
In the long run, that is often the most prominent deciding factor.
Moreover, stocks are essentially the function of the economy.
There are some stocks that may be in focus at certain times.
It all depends on the overall state of the economy.
Different times and countries go through varying economic cycles.
The stock selection is directly dependent on the challenges in the economy.
The other key factor is the risk appetite of an individual.
Different investors have different degrees of risk-taking power.
No textbook can give you definitive indication regarding that.
This is one unique element that every investor has to think for themselves.
The stocks that you will invest in will depend on this key trigger.
So investing in stocks is a function of multiple factors in unison.
Start Investing in Stocks
Here is the stages you have to pass to start investing in stocks:
- Determine Your Investment Objective
- Choose the Right Tool for Investment
- Research Is Important to Start Investing in Stocks
- Analyzing the Financials of the Stock to Start Investing in Stocks
- Look out for Housewives to Start Investing in Stocks
- Make the Trend Your Friend
- Additional Income Opportunity
1. Determine Your Investment Objective
Often your approach towards how to start investing in stocks is also based on your objective.
Whether you are investing for the long term or immediate gains will dictate your choice of stocks.
It will also determine the type of stocks you select and the investment instrument that you choose.
For example, someone looking at immediate gains may prefer stocks with huge intra-day movement.
In the same vein, someone with long-term objective may choose stable blue chips.
These stocks may not yield great returns over short-term, but longer term scopes are huge.
So there are different kinds of stocks that you can choose for different periods of trading.
There are some that can help you book immediate profit.
Again there are some that will be profitable only over the medium to long-term.
Your profitability prospects will also alter based on the exact time that you are investing in.
Ultimately this will decide on the kind of profit that will be booked.
The same stock will yield different returns over a different time period.
Even the choice of stocks for a specific time period will have a bearing on profitability.
So, you can see that this is completely linked to your ultimate investment objective.
The objective is the primary deciding factor for any investment.
Whether you choose to buy or not, and for how long are linked to it.
In fact, if you see, the art of investment is all about the time factor.
It is the center point for a meaningful and long-term investment goal.
In the absence of an appropriate objective, realizing the long-term goals is difficult.
Moreover, it is the time factor that can ultimately help you achieve your goals properly.
So before you invest in stocks, decide on your investment objective.
2. Choose the Right Tool for Investment
Investing in stocks is not just about choosing the right counter.
It is also about choosing the proper mode of investment.
When you invest in stocks, one option is to go for direct investment.
That is however not the only opportunity.
You can also invest in Mutual Funds or Exchange Traded Funds.
These are essentially seen as low-risk alternatives.
However, if you are playing for sheer profitability, direct stocks offer the best returns.
Whether it is Mutual Funds or ETFs, these are indirect exposures.
The specific stock’s value is used as a key to determine the type.
The duration of your investment is another important factor.
For example, Mutual Funds have a specific lock-in period.
Exchange traded funds in comparison are easier to transact.
However, there are specific tax liabilities on these ETFs.
Again in comparison, direct stock transactions attracts capital gains tax.
You also have to calculate the brokerage fees associated with your transactions.
So all in all, these factors play a crucial role in deciding what kind of investment vehicle you decide on.
Even when you decide on just vanilla stocks, your choices don’t become easier.
Different investors go for different options
You have a group of investors who only trade in blue-chips.
On the other hand, there are many who put their money in penny stocks.
There are some who may only invest in IPO stocks.
Many only play the Index.
Some market veteran prefer derivatives to regular stocks.
All of these stocks have their own unique set of advantages and disadvantages.
Finally, it is the kind of returns that you will get, helps you take a call.
Different types of stocks also have varying risk profiles.
The price volatility and intra-day price swings differ as well.
3. Research Is Important to Start Investing in Stocks
Detailed research is one of the cornerstones of a great investment.
Investing in stocks is a lot about undertaking the qualitative study.
When you invest in a stock, you are putting your savings at stake.
The return prospects are the only insurance that you have.
Your entire money is invested on the basis of only one expectation.
The particular stock that you have chosen holds the promise of delivering a certain amount of return.
In many ways, that is the only promise that you have to base your investment on.
That is why research is such an important part of the stock investment.
Proper research will help you identify the most relevant stocks.
That will help you take conclusive and constructive steps towards a profitable investment.
Thorough research will help you create a proper database for all potential picks.
Most importantly different kinds of stocks satisfy different investment goals.
Even these goals can be created only when you can create a proper understanding.
So research is never just about what stocks to buy.
It is also about deepening your understanding of the markets.
You have to understand that every channel of investment is guided by certain conditions.
So in short research helps you in making an informed choice.
After all, investing in stocks is all about responding to available information.
Markets are extremely uncertain, so is the economy and the global political situation.
That is why only in-depth research can help you make a stable call.
Moreover, there is no certainty that the trade will pan out exactly the way you envisage.
In that situation, only a strong research base can help you think fast and make alternate plans.
Mostly, time speed is the biggest game changer in stock market transactions.
4. Analyzing the Financials of the Stock to Start Investing in Stocks
So you are ready to invest your time in research.
But the question is what the parameters to base your research on are?
Different stocks have different pre-conditions.
Different sectors have different challenges.
But at the same time, the basic financials of the company needs to analyze.
After all, a stock can be only as good as the intrinsic business in.
If the business is not doing well, a stock cannot hold on its own for too long.
So the fundamental value of a stock is closely associated with the health of a business.
Therefore, the top line or revenue is the most important factor to monitor.
The profit of a stock goes hand in hand with the revenue number.
So topline and bottom line are the most prominent numbers to watch.
Now you have associated factors like gross income and net income.
Moreover, you have the operating profit margins and the net margins.
You also have the profit before tax and profit after tax.
In short, these are also derivatives of the primary profit and revenue figure.
They all represent the various degrees of profitability and income potential.
These numbers help you assign a certain intrinsic value to the stock.
The debt and the leverage the business is exposed to is another very important factor.
On an average, every business is exposed to a certain degree of debt.
But you have to ascertain how badly the business is affected by the debt.
Is the debt a long-term liability or a short-term necessity?
Also, the impact of the debt on the working capital and capex plans is crucial.
In some or the other way, these are crucial indicators of the health of the business.
The stock will represent proper value only if the business shows potential.
5. Look out for Housewives to Start Investing in Stocks
When you start to invest in stocks, the brokerage views offer some simple perspectives.
Most brokerage houses follow a certain set of stocks.
They typically release a definitive set of recommendations on this.
This normally includes financial analysis, future projections and even peer comparison.
These can be rather handy and informative in terms of giving a perspective.
The deductions can be quite simple for this.
Whether you are a market veteran or a beginner you can look at benefit from it.
Let’s say I have to debate whether to buy stock A or B.
Now there are only 3 brokerage views on stock A.
Of that 2 are calling for an ‘Underweight’ but one calls for a ‘sell’ on the stock.
However, stock B is much better covered by brokerages.
I get a mean of over 21 houseviews.
Of these 21 views, there are some who recommend ‘Buy’, ‘Hold’ and ‘Overweight’
Now with just that small recommendation, you get a basic feel for the stock.
When you see only 3 brokerages covering stock A, it means it is not a popular story.
On the other hand, it can be a niche story too.
So that means, you have to analyze deeper.
Now there are 21 brokerages for stock B.
That clearly means that it is a more popular story.
Most importantly, the story represents sufficient value for so many brokerages to follow.
Though the recommendations may differ, there is a common positive tone.
This means the fundamental story offers a distinct amount of promise and potential.
That is often the first step to choose a stock.
Now you must also watch out for the price target.
They will help you calculate the remaining room for growth.
In many ways, that helps you calculate the potential percentage gains.
6. Make the Trend Your Friend
When you start investing in stocks, the trend is a very important factor.
You have to be careful to understand when to befriend the trend.
At the same time, a smart investor has to be equally prepared to buck the trend.
When you start investing in stocks, it is better to avoid any radical step.
This is exactly why it makes sense to stick to the broad market trend.
The advantage in this is your average loss prospects are fairly limited.
You may not book extraordinary profit, but at the same time, your loss will be limited.
If the overall market yield is a certain X percent, you can be sure to clock that.
Moreover, when you follow the broad market trend, your gains are synced with the Index.
That can be a matter of huge reassurance to the average investor.
However, this is true mostly about ranged or rising markets.
The dynamics change completely when the markets book losses.
Do not panic unnecessarily because the markets are falling.
As an astute investor, it is important to evaluate your investment objective.
The duration or the broad investment timeline is also important.
If you are invested for the longer term, short-term price corrections are not a problem.
You should not panic and sell your stocks.
On the contrary, you have to buck the trend and increase exposure in the stock.
Given the fact that you have chosen a quality story, you must hold on to them
Everyone selling is not a reason enough for good quality long-term stories.
Similarly, if you see some penny stock jumping ahead, it is never advisable to buy them.
If you have not bought them earlier, it is better to give a pass.
So stick to quality stocks and don’t panic.
7. Additional Income Opportunity
Investing in stocks is often a full-time job.
You have to be alert to the various news based developments.
You have to also account for any major global development.
In short, this means that you have to devote quite a lot of attention.
Therefore, it is only fair that you can optimize your income opportunity.
There are primarily two main ways to earn from stocks.
The first is the most basic one.
Depending on the price of your stock and the scale of appreciation, you earn returns.
But at the same time, there are other ways to earn from the same stock.
You can look at regular dividends and choose preferential shares.
This means that you can earn money in more than one way.
The stock and your investment remain the same.
However, the scope of your earnings increases or doubles up.
The same amount of money helps you earn more profits.
This is a very important consideration.
After all, the science of investment is all about earning money.
So if you can get an opportunity to add to it, you must always do so.
But attention to details and the actual condition is very important.
Therefore, a sound investment objective is most important when you start investing in stocks.
Your entre choice, risk-taking ability and sectoral preferences will all depend on the objective.
Moreover, the stocks you choose should have a sound financial foundation.
That is the basis of strong investment policy.
For this, you have to get into expansive research into stocks.
Just reading some stock recommendations is not enough to buy stocks.
It should be backed by your research and strong conviction.
Don’t lose sight of the fundamental considerations.
Last but not the least, you have to maintain objectivity.
Don’t let your emotions dictate your decisions about stocks.
You have to decide in a cool-headed fashion.
That alone will help you earn profit when you start investing in stocks.