How to earn profits through share trading

If you are tuned into financial media but have yet to begin investing, you may be under the impression that making profits through the share market means picking the right stocks and doing nothing.

However, the truth to making money in the stock market is not just to buy and sell stocks but to own and hold securities, receive interest and dividends and take advantage from the long-term growth in the value of your portfolio.

If you are looking at how to invest in share market and earn profits from it, here are essential points to keep in mind.

Buy and hold

As an investor in stocks, it can help to remain focused on overall return while deciding to stay invested for the long run. This means that at the very core, you may want to hold on to valued stocks for at least five years, provided the company has robust finances and shareholder-friendly practices.

For instance, well-known investors such as Warren Buffett and Charlie Munger have held onto valuable company stocks for over 25 years, and sometimes even 50 years. Keeping in line with their investment principles, other investors too have also followed their footsteps and amassed considerable wealth by investing for the long term.

Unfortunately, many new investors are still grappling with understanding the actual dynamics of making money from the share market. Understanding where wealth comes from or how the process works can be baffling for most new investors.

To clarify this, it can help to know that In the stock market, your wealth is built primarily from:

• A rise in tIe stock price

Over an extended time frame, the stock market continues to value the increased profits of a company. In doing so, it raises the share price based on the company’s expansion, profitability and share repurchases.

For instance, if Company A with Rs. 10 stock price rose to 20% in 10 years due to its expansion and share repurchases, it could be approximately Rs. 620 per share in 10 years, assuming that the stock exchange maintains the same price to earnings ratio.

• Dividends

When you receive earnings from the stock in the form of dividends, you get the money through a cheque, a direct deposit into your bank account or as additional shares in the same company reinvested on your behalf.

Sometimes, during market volatility, you could have the opportunity of making a profit by selling your shares to another investor for more than the company’s worth. In the long term, however, your returns are adhered intricately to the underlying profits rendered by the company’s operations that you own.

The idea of earning quick money quickly can sometimes cause people to make grave errors.

It is critical to have discipline and patience, as well as a thorough understanding of the stock market. Here are vital points to keep in mind. These include:

• Make a watch list of growth stocks and know how they are performing
• Know your risk appetite, knowledge and the time needed to achieve your financial goal to decide your trading strategy in equities.
• Maintain feasible expectations from the share market without thoughts or imaginations of turning rich overnight.
• Diversify your portfolio across asset classes and industries as a useful strategy that can help you to earn profits while cutting down your risks.
• Keep an eye on the financials of the company you have invested in, the overall industry and the economy at large, thus in short monitoring your portfolio and taking necessary action when needed.
• Practice the fundamental method of investing while avoiding speculative moves.
• Keep away from the herd mentality. Refrain from making decisions based on rumours and emotions.
• Avoid trying to time the stock market, as it can be futile, and no one can determine the outcome of any stock accurately.
• Maintain a strategy and have a disciplined approach towards your investment.
• Emotions such as fear and greed must be effectively controlled during market fluctuations.
• Maintain realistic and achievable financial goals.
• Look to re-invest your surplus funds rather than taking a loan or debt.

Bottom line

To begin trading in the stock market, you will need to open a Demat and trading account with a stockbroker such as Kotak Securities. Like millions of successful investors, you can easily pave your way to wealth, even with little savings, through discipline and commitment.