How to invest in stocks
How to invest in stocks
It is a place where shares of pubic listed companies are traded. The primary market is where companies float shares to the general public in an initial public offering (IPO) to raise capital.
A stock exchange facilitates stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India’s premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange.
Types of Investments
Bonds, or fixed-income securities, are debt investments in which an investor loans money to an entity, with interest. The borrower borrows the funds for either a fixed or variable period of time.
Mutual funds are operated by money managers and should match the investor’s objective. They are made up of a bunch of funds collected from many investors and the purpose is to invest in securities like stocks, bonds, etc.
Small-cap investors are the risk takers. These small companies have huge potential for growth. However – because they are often under-recognized, more research is necessary. This requires the investor to have more time available to properly crunch numbers.
Large-cap investors are more conservative – these guys like to play it safe. With their steady dividend payouts, these big-cap blue chip companies are as stable as they come
Penny stocks are super high risk because of their lack of liquidity. Beginners are often lured in to these stocks because of their crazy low share price. This allows investors to hold thousands of shares for a relatively small amount of invested capital. With a scale like that, the gain of just a few cents per share can translate into major returns.
Some different styles of investing include:
A swing trading position is held longer than a day trading position, but shorter than a buy and hold investment strategy that can be held for months or years. Typically, a tradable asset would be held for days at a time in order to profit from price changes or ‘swings.’ Profits can be attained by either buying an asset or by short selling.
A value investor believes that the market overreacts to both good and bad news. He/she would look for stocks that they believe the market has undervalued; thereby profiting by buying when the price is deflated.
Growth investors invest in companies that show above-average growth. Growth investing focuses on capital appreciation. Growth investing kind of contrasts with value investing.
Points you should consider before investing in stocks
- Determine your budget
New investors often ask this question in two parts:
How much money do I need to get started? The amount of money you need to invest in individual stocks depends on how pricey the shares are. If you have Champagne tastes and a limited pool of money, a broker that offers fractional shares — pieces of stocks — might be for you. But, remember, we like mutual funds, right? If you want mutual funds and have a small budget, ETFs may be your best bet. Mutual funds (including index funds) have minimums of $1,000 or more, but ETFs trade like a stock, which means you purchase them for a share price rather than a fund minimum. That share price might be $10 on the low side and $100 or more on the high end.
How much money should I invest? If you’re investing through funds — have we mentioned this is our preference? — you can allocate a fairly large portion of your portfolio toward stock funds, especially if you have a long time horizon. A 30-year-old investing for retirement might have 80% of his or her portfolio in stock funds; the rest would be in bond funds. Individual stocks are another story. We’d recommend keeping these to 10% or less of your investment portfolio. That’s because trading in individual stocks carries more risk — it doesn’t have the built-in diversification of a fund — and more hands-on effort. Those stock tickers don’t always continue on an upward trajectory — just ask Enron’s investors.
- Choose between stocks and stock mutual funds
For most people, investing in stocks means choosing between these two investment types:
Stock (also called equity) mutual funds or exchange-traded funds. These mutual funds let you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs track an index; for example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it. When you invest in the fund, you also own small pieces of those companies. You can put several funds together to build a diversified portfolio.
Individual stocks. If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment.
The upside of stock mutual funds is that they are inherently diversified, which lessens your risk. But they’re unlikely to rise in meteoric fashion as some individual stocks might. The upside of individual stocks is that a wise pick can pay off handsomely, but the odds that any individual stock will make you rich are exceedingly slim. For the vast majority of investors — particularly those who are investing for retirement — building a portfolio composed primarily of mutual funds is the clear choice.
1 . Determine your investor type
Before you dive into buying stocks, it’s important to know that there are several ways to approach stock investing. Choose the option below that best represents your situation.
“I’m the DIY type and am interested in choosing stocks and stock funds for myself.” Keep reading; the steps below are for you. Or, if you already know the stock-buying game and just need a brokerage, see our round-up of the best online stock brokers.
“I know stocks can be a great investment, but I’d like someone to manage the process for me.” You’ll want to check out our top picks for robo-advisors, which offer low-cost investment management. All you have to do is answer some questions. They’ll take it from there, investing your money for you in a way that makes sense for your situation.
Open an account
If you’re participating in a workplace retirement plan such as a 401(k), you may already be invested in stocks, likely through mutual funds.
If you don’t have a 401(k) or you find its investment choices lacking, you can use an online broker to buy stocks, funds and a variety of other investments. With a broker, you can open an individual retirement account, also known as an IRA — here are our top picks for IRA accounts — or you can open a taxable brokerage account if you’re already squared away for retirement.
If you’re opening a new account, consider brokers that have low fees and low account minimums. Many of those on the list of best brokers for beginners require no minimum deposit. Most brokers offer a list of commission-free ETFs or no-transaction-fee mutual funds, which will allow you to avoid a charge each time you buy or sell. With individual stocks, you can expect to pay $5 to $10 per stock trade depending on the broker, though there are free services like the app Robinhood.
When comparing brokers, be sure to consider:
Research resources. Reliable data on leading companies can significantly streamline your stock-buying homework, and many top brokers offer it.
Customer support. The best brokers offer real-time assistance through multiple channels, including by phone, email or chat.
Educational resources. Broker-produced guides and tutorials can help beginners get up to speed on the stock-buying process much more quickly.
Trading platform. You can buy stock through any online broker’s website, but if you plan to nurture this habit, you may want to graduate to a more advanced and user-friendly system.
DO YOUR RESEARCH
Research is key to investing in individual stocks. You can’t predict the market, but you can do as much as possible to steer your portfolio toward expected high-achievers. That means researching past performance, analyst ratings, recent news out of the company and annual reports. All of this information should be available through your broker’s website.
With ETFs or index mutual funds, researching an individual fund’s performance is less important than understanding its fees and whether the fund meets your investing needs. Because these funds replicate a stock index, their performance will align closely with that benchmark, and funds tracking the same benchmark should nearly mirror each other.
Your job is to figure out what kind of funds — and underlying those funds, stocks — you want in your portfolio. If you want to hold large U.S. companies, you may be drawn to S&P 500 index funds. If you want small companies, you might look at Russell 2000 funds.
Then compare funds that track the same benchmark by their fees. Each fund will clearly list its expense ratio — the percentage of your investment that goes toward the fund’s annual operating costs. Aim to keep that number under 0.25%, though it may stretch higher for niche funds.
MANAGE YOUR EMOTIONS
This is potentially the hardest part about investing. Be prepared to see big swings in the share price tied to company news, general market turmoil and who knows what else.
Investing is emotional. It’s all too easy to panic and pull out at the wrong time or get swept up in a rally and invest more than you can afford in what feels like a winner. But it’s important to stay the course, as long as you have a long-term plan you feel good about.
That means knowing how much you want to invest at what price, and how far you’re willing to let a stock fall before you sell. These kinds of rules, as well as choosing the right order type when you place a trade, will limit your risk and help you fight back against emotional responses.
Tips for stock investment
- Avoid the herd mentality
The 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.
- Take the 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
- 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.
- Don’t try to time the market
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.
- Follow a disciplined investment approach
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
- 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.
- 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
- 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
- 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 may led to their downfall thus, fear and greed are the worst emotions to feel when investing, and it is better not to be guided by them.
- 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.