How to Invest in the Share Markets?
Investment, by definition refers to the long term. What is long term according to
an acceptable definition? Normally, any holding period above 1 year is considered
to be long term any if the investor buys a stock with the purpose of holding for
more than a year it is called an investment. The idea of invest in the share market
is to get the best benefits of dividend payouts and also capital gains on the stock
Process of Investing in Share Market
The process of investing in stock markets begins with opening your trading and demat
account. While the trading account will execute your transactions in the share markets,
the demat account is where your shares are held in custody. Once the trading and
demat account is opened then you can either opt to invest through the offline mode
or the online mode. How you buy the stock for investment matters a lot as that virtually
decides how much wealth you can create over time and what returns you will get on
5 Steps to Investing in the Stock Markets
Shortlisting the stock for investment
The first stage is shortlisting a group of stocks to invest in. You can use the
screeners in the website of your broker to short list such stocks that meet your
criteria and then zero down to the one stock that meets all your requirements. This
is an important decision stage because you have a choice and you need to choose
the best stock for you.
Doing your homework on the stock
The second step is to do you full and detailed homework on the stock. Understand
the business of the company, the prospects of the industry as a whole and also the
merits and demerits of the company’s financials. Don’t just rely on research reports
but also talk to other investors and do channel checks with the competitors and
Getting the execution right
A lot of investors believe that since investment is for the long term, the method
of execution does not matter. That is wrong. You need to ensure that you get best
possible price even when you are investing. Also check the total transaction and
statutory cost and check how it impacts your break-even point. All these add up
to making a big difference to your eventual investment performance. Quite often,
execution tends to get ignored but an understanding of costs and levels can make
a big difference to your eventual investment performance.
Monitoring your investments
The best of investors spend a lot of time monitoring their investments. They work
out how news flows and announcements will impact the price of the stock. They also
monitor how the macro variables like inflation and interest rates will have an impact
on the stock price. Above all when prices are rising, you must monitor and check
that it is not skewing your portfolio in favour of too much sectoral or thematic
risk. Monitoring is a continuous affair when it comes to your investments.
Exit is an art, not just a science
The harsh reality of the market is that even the best of investments will yield
profits only when you exit the stock. But exit is a slightly tricky decision. You
don’t want to wait too long to exit and then realize that the stock has corrected.
You also don’t want to exit too early and then realize that the stock has gone up
another 20% after y our exit. How you balance is the art. The thumb rule is that
you must set a price target and exit the stock when the target is achieved. In case
you have a strong reason to hold, then it must be done with trailing stop losses.
How Not to Invest in the Share Market?
While investment is for the long haul, there are two basic rules you need to follow.
These rules tell you how you should not invest in markets.
Don’t go by past performance alone
Pedigree and past performance does matter in deciding upon an investment. But more
importantly, it is about finding the right stock at the right price. The best stocks
with sound fundamentals can be very attractive at a price but awfully expensive
at a price. Investing is more about the future and less about the past.
Don’t try for a 100% guaranteed product
Frankly, it does not exist because all stocks entail risk even with the best of
your efforts. You can do your research and due diligence as well as fine tune your
order placement process. But once that is done you just need to go with your gut.
Investing can never be a 100% game so don’t wait too long to get it fully right.
If you have put your best foot forward, just go with your gut feel.