Stock markets are considered the best asset class for investments. The reason is the flexibility they offer to the investors in the form of amount required to invest, the liquidity, the time horizon and vast investment opportunities.
You can start investing in stocks directly if you know the basics of investing in stocks. You can invest in stock markets through mutual funds if you do not know how to invest in stocks but still want to invest in equities.
You can start investing with small capital or big capital, there is no such restriction. So, stock markets are more flexible regarding investing unlike property or real estate business where you need much higher capital to invest.
Another advantage of investing in stocks, as we talked above is the liquidity. If you have invested in stocks and you need to liquidate your investment, you can immediately sell your stocks. Money is credited back to your account within 24-72 hours.
No need to find the buyers unlike in real estate. This is very useful when you have any financial emergency and you need money urgently.
If you have made your mind for investing, we are here to move ahead on how to invest in stocks. These are very simple tips for investing in stocks for beginners too.
Benjamin Franklin says ;
“An investment in knowledge pays the best interest.”
So it is important that you yourself know how to invest in stocks. Make a rule to ‘ Do It Yourself (DIY) ‘. It will go a long way to help you making money in stock market and get rich.
Do not follow the tips on investing. It is your hard earned money and you should decide it yourself where to invest in stocks.
Table of Contents
Create A Capital
First thing you need to start investing in stocks is the capital. Capital is the money you would be investing to buy stocks. For investing, always use your surplus cash. The cash you do not need and risk to loose also.
As investing is associated with a lot of market related risk, you should be prepared for the risk of loosing money. But as we invest for long term, the risk becomes nearly zero with the time.
It is important that you do not confuse between savings and investments. Savings are for meeting our short term expenses. Investments are there to make your money grow. They require time to bear the fruit.
Learn more about difference between savings and investments.
First create an emergency fund to meet your routine or other financial emergencies. An emergency fund, ideally, consists of preferably an amount equal to your annual income or at least six months income.
With emergency fund besides, you would not need to dilute your investment in case you have to face any financial emergency.
Inexperienced investors make the mistake of investing all the savings they have. When they face any financial emergency, they have to exit their investment, sometimes in losses.
After creating an emergency fund, create a capital for investing. You can spare the amount on monthly basis from your income and invest systematically too.
Get Your Demat Account Opened
The next step to start investing in stocks is to have an on-line account ; the trading account or a Dematerialized (Demat) account. Of course, you can buy stocks off line too, through a stock broker. However, having personal account and doing it yourself has its own advantages.
The things to consider while choosing a stock broker or on-line trading account is the brokerage charges and the quality of the services they provide.
With a trading account, you can buy stocks online and start investing quickly.
Choose The Best Stocks To invest In
Now comes the tricky question, especially for the beginners. What are the best stocks to invest in? How you would know what are the top stocks to buy?
Well, it requires some research to know that. Being a beginner should be no hindrance to that. You can use your basic understanding and common sense to find good stocks to buy.
Warren Buffet says :
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
First of all, invest in a business and not in a stock. The business you understand. The business you believe to grow in future.
For example, there are banking stocks. No economy can flourish without banks.
There are housing companies. Population is rising and people would need homes to live in.
There is auto demand rise with rise in population. Auto demand needs tyres, batteries etc.
You can use these factors to screen good stocks to buy for investing.
First select a business you find promising. Make a list of the stocks in that business. Do check the fundamentals of those stock companies.
Fundamental analysis involves checking the balance sheets and important ratios of the companies. It is a complex task but you may shortlist few indicators for screening.
You can use P/E ratio or price to earning ratio to find an overvalued or undervalued stocks.
Price to earnings ratio is the ratio of current share price or stock price of a company and earnings per share per year for that company.
Stocks with P/E ratio less than 20 make a good investment option. They are undervalued stocks. Undervalued stocks has the possibility of value unlocking. When this happens, the stock finds the buyers and see price rise.
Stocks with P/E ratio more than 20 are considered overvalued stocks. Those stocks have already seen the value unlocking. However, that does not mean that they would not perform now onwards.
Check the balance sheets of these undervalued stocks. Look out how the company is performing on quarterly basis.
Stocks with lower P/E ratio should have rising sales data for the past few quarters and no or minimum debts on the balance sheets. Those stocks make good candidates for investing.
Various research firms keep releasing research reports about new stocks to invest in. You can take the guidance from there if you are unable to reach a conclusion.
Always check the credibility of the research firm and cross check the research reports. You can do that by Internet search and find what other firms are saying about that stock.
Make A Plan
Now plan out the things about your investment. What is the time period you are going to give to your investment? In how many stocks to invest in? How much allocation you going to give to the stocks you chose?
Fix a goal for yourself. How much money do you expect to make from this investment? When to exit the investment?
This helps you bear the rough times in stock markets when the stocks are falling. You can decide to buy more on correction.
It is a good idea to diversify your investment. You can choose more than one stock to invest. This lowers the risk of investing. If one stock does not perform well, the other may compensate for the losses.
Start Investing In Stocks
Now, that you have found stocks to buy, it is time to start investing in stocks. You can choose to invest in lump-sum or in small installments in regular intervals.
If you opt to invest in installments, then start it immediately. Do not wait for the right time or try to time the market. It is always a right to start investing when you decide to invest.
M. Luther king said ; The time is always right to do what is right.
Divide your capital into equal parts and start buying the stocks. This is the best way to invest money in stocks.
If you want to invest in lump-sum, then you can take the help of technical charts to find more appropriate entry point. This is because the stock may have been through a sharp rally in recent past and may be ripe for a correction or fall in stock prices.
Charts help you avoid the agony of buying a stock at the peak before a fall in stock price.
Stocks in an up-trend or trading above 200 day moving average are the right candidates for investing. When they start trading below it, then you need to take caution.
Read about technical charts to learn about technical analysis.
This is the last step. And it is equally important as starting to invest. When you are near the completion of your goal, you should start booking profits.
Leaving the profitable investment on the mercy of stock market whims can be dangerous. You never know when the markets or the fundamentals of the stock turnaround and take away your profits.
Cutting short the losses is also an important part of investing plan. If your investment is giving you losses even after giving enough time, it is better to exit it.
Investing in stocks has no hard and fast rule. Anybody can go wrong there. Even seasoned investors has to face failures. But what makes them different is cutting the losses short and exiting timely.
This should help your questions about investing in stocks. If you still have any questions, share with us!