Human wants are unlimited, and to cater them, money is a significant element. However, in today’s era, with pacing inflation, technology, human needs, earning money from regular sources may not be enough. Humans need to make conscious management of earned money. Saving and investments have become key functions for such management.
Savings can be one of the best techniques to discipline your finances. However, it should be followed by the process of investing, or else the value of earned money may be lost in future. Investing is a significant decision, and people are usually wondering about where to invest money to get good returns.
The stock market can be a potential investment avenue for investors. As per a report, retail investors in India are investing nearly $7.6 billion in their domestic stock market. Moreover, key market indices like Nifty 50 have grown by nearly 215% in the past 5 years as of October 2024. However, such market exposure also adds an element of risk to it. Investors may encounter the question of how to make money in stock. Don’t worry, we have your answer. Read this article to explore ways to make money in stocks.
Significance of investing
Inflation eats up the value of money over a period due to the phenomenon of time value of money. The things that ₹20 can buy today may be worth ₹30 after some years. However, this can positively affect investments. Therefore, understanding the significance of investing can help investors plan and unleash the power of investing.
- Compounding: Simply, when the money earns interest over interest, it is known as compound interest. Investing for a long time can help investors combat the inflation effect and retain/grow their money’s value.
- Financial independence: Over a period of time, investing can help one create a surplus fund or provision for future expenses.
- Wealth building: Investments are a crucial part of wealth, which is later transferred to the successor. Idle money savings may not match the desired wealth levels.
- Security against uncertainty: The future is uncertain, and one may face the financial burden of such uncertainty. Therefore, investing and creating an emergency fund is necessary.
All about the stock market
It is a well-known place for investment. As the name suggests, it is a marketplace where investors can invest in different companies by purchasing their fractional ownership in the form of shares. In the stock market, the price of shares is decided by the joint efforts of buyers and sellers. Investor confidence is evident in price movements.
There are two types of stock markets based on the type of share issue: Primary and secondary.
- Primary markets: In this, companies raise funds from prospective investors through the process of Initial Public Offer (IPO). Post the process, shares of this company are listed on the market and are available for trading.
- Secondary market: In this, already listed shares are traded by the investors. Moreover, based on security, there are multiple segments in the secondary market, such as equities, equity derivatives, commodities, currencies, etc.
Stock market returns and their stories usually make it a lucrative investment option. People usually ask questions like how to trade online and make money, how to buy shares, how to make stock market investments, etc. The stock market doesn’t require any special eligibility. However, investors should learn some basics of the market before investing.
An interesting read: An exploration of secondary market dynamics
How to make money in stocks?
The stock market doesn’t require specific qualifications, investment amounts, or status. It only needs some basic formalities, such as a bank account, demat account, permanent account number (PAN) card, etc. Prospective investors with the required skills can invest in the stock market based on their suitability.
Here are some of the money-making tools related to the stock market:
Capital appreciation
When an invested capital rises without any extra investment and through market forces or good company performance, it is known as capital appreciation. It is a gradual process and investors willing to invest for the long-term may find it suitable. It can be measured by subtracting invested capital from the instrument’s market value.
The stock market is affected by varied factors, and capital can appreciate due to them. These can be a rise in demand, positive company news, or indirect positive factors. Investing in undervalued stocks can benefit investors with capital appreciation.
Dividend income
Equity shares are fractional ownership and these shareholders have the right to earn the appropriate part of the total profit. After completing compulsory obligations like debt payments, the remaining profit is distributed among the equity shareholders as per their equity holding. This income is known as a dividend. One can check the dividend yield of a stock before investing.
Dividend yield = dividend per share/ current market price of the share
The dividends distribution is based on the company’s discretion. The shares with regular dividend outflow attract investors. Moreover, investors can reinvest this earned dividend into other instruments based on suitability.
Derivatives trading
Derivatives include instruments like futures and options. Former is the contract to buy or sell underlying instruments at a future date and pre-decided price. Options have a similar nature, but investors don’t get delivery of instruments like futures. Investors, comfortable with heavy risk exposure, can make money in stocks through derivative trading.
Day trading
Trading is the process of frequent buying and selling. In the intraday market setting, a trader buys and sells the security on the same day. They seek to profit from market volatility in the short term. Risk-seeking investors may find intraday suitable. However, it constitutes various strategies, technical analysis and constant monitoring of the market. Traders can start with a regular equity market and gradually shift to derivatives trading by understanding the market conditions. Moreover, one can also seek professional help for the same.
Mutual funds and exchange-traded funds (ETFs)
An indirect way of investing in the stock market is mutual funds. It pools investors money to invest in equities under the category of equity-oriented funds. Investors can also make Systematic Investment Plans (SIPs). It can help discipline the investment process and unleash compounding benefits. Moreover, investors can get exposure to a variety of stocks through one scheme. It will balance the risks and returns from these funds. Mutual fund houses also distribute dividends in Income Distribution and Capital Withdrawal (IDCW) options.
Apart from this, ETFs have similar functions to mutual funds and can be a suitable option for indirect exposure to the stock market. Moreover, they are listed on stock exchanges and can give investments in a diverse range of assets.
Also, read about What Are Exchange Traded Funds (ETFs) and How Do They Work?
Steps for investing in stock market
These days, several applications and websites are available with the help of brokerage firms, which simplifies the investment process. Investors can open a Demat account and start investing with the following procedure:
- Consult your bank or brokerage firm to find depository participant’s websites.
- One can find an option for a demat account on this site. Further, fill out the application form and provide the basic details.
- Fill in the bank account details and provide documents like a PAN card for verification.
- E-sign the completed form and submit it.
- Post these steps, one can sign in to the authentic stock trading applications.
- Add funds to this virtual account and start picking the desired stocks for investment.
Remember this while you make money in stocks!
The stock market has heavy exposure to risk in various ways. Investors willing to make money in stocks may consider the following points before and during the process of investments:
- Investment advice, strategies and comfort are not the same for everyone.
Investors should not blindly follow popular stock tips or strategies. Every investor is different based on their financial objectives, risk tolerance and capacity. In the foremost step, investors should check their suitability.
- Market volatility is its inherent tendency.
Investors have different investment psychologies and perspectives. When these perspectives clash, the market volatility rises, and prices fluctuate heavily. However, due to the presence of such a large base of investors, such a clash is obvious. Investors should not panic in the market volatility conditions. Rather, they should calmly analyse the situation, ask for professional advice and keep monitoring.
- Risk management should accompany the investment process.
Generally, investors make the mistake of not prioritising risk management and investing all their savings. Uncertainty always lurks over human life. Therefore, one should plan strategies to mitigate risk, prepare an emergency fund, invest in insurance, etc.
- Lack of diversification may affect the portfolio.
Diversification refers to spreading investment in more than one stock, sector or instrument. It helps one gain exposure to variety and spread risk.
- Proper research and analysis is the base.
Investments are crucial decisions and their management should be done consciously. Investors can study different strategies, research matrices, market conditions, etc. Moreover, constant upgradation of knowledge is an essential characteristic of an informed investor.
- Emotions should stay out of the market.
Emotions like ego, sympathy, panic and jealousy can be a potential evil for the investment process. They can make decisions biased and can adversely affect the investments. Therefore, investors should try to keep emotions aside and make rational and informed decisions based on the research and analysis.
Bottomline
Investments can be a soft cushion for investors in times of uncertainty. Individuals seeking investment options can resort to the stock market after checking their personal suitability. It provides the desired market exposure but is accompanied by risk. By understanding and analysing the stock market, investors can make money in stocks through dividends, derivatives, capital appreciation, etc.
Must read: Your comprehensive guide to successful share market investing
FAQs
- How to get profit in the stock market?
Individuals should first invest in the stock market with proper research and analysis to earn profit. Moreover, one can use strategies like diversification to spread varied investment avenues. Apart from trading activity, one can earn dividend income from the shares. It is a part of the profit that the company earns.
- How to trade online?
Trading shares online would require investors to open a demat account and enable intraday trading or F&O (derivatives segment). Several brokerage firms offer this service through their website or applications. However, one should have sound technical analysis knowledge to trade in the market, or else it is highly risky.
- What is the dividend from stocks?
The extra income earned by investors based on their fraction of ownership is the dividend. It is a part of profit. Companies first pay the debt obligations and later decide on the remaining profit’s reinvestment or distribution among shareholders. A company’s dividend-paying nature is reflected by its dividend yield.
- What is the strategy of diversification?
It is one of the most popular strategies. Investors spread their investments in different assets, sectors, stocks, etc., to earn returns from multiple avenues. Moreover, this helps in spreading the overall portfolio risk among these investments.
- What are mutual funds?
These are pools of investor’s money, which invest in different securities. It is a broad umbrella for different categories of funds. Investors willing to have market exposure but have less risk appetite can invest in mutual funds for indirect investment. Moreover, mutual funds have different assets or stocks in one scheme, which usually attracts investors.
