Investment, by definition refers to the long term trading. What is long term trading according to an acceptable definition in share market? Normally, any holding any stock for the period above 1 year is considered to be long term stock market investment 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 price.
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 the stock.
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 distributors.
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.