The stock market has always been fascinating from the outside. Every investor wants to make money in the stock market, which is creating excitement and adrenaline rush for not only a newcomer but also an experienced, seasoned trader. It is easy to make money in the stock market but difficult to sustain the same level of profitability for the long term consistently. Consistent profits, be it as an investor or a trader would require a sound knowledge of the practical aspects of the capital market, patience, discipline and acceptance to mistakes and learn from them every day.
Every participant may have a different strategy to earn his share of profits from the stock market. However, broadly, there are two types of market participant dealing in buying and selling of securities;
Long term investor believes in buying and holding a particular stock for the long-term as his way of creating wealth and generate passive income. They don’t track the price of the stock but analyse the value of the business. They believe in fundamental analysis of the company, including comparing ratios, profitability, growth and sustainability of the company with other peers in the industries. Here are a few things to keep in mind before starting your career as an investor.
- Invest in businesses – Smart investors understand the business and not the stock price. It is very imperative to understand the business of which you are going to become a part-owner. By understanding the business in-depth, the investor shall be able to envisage the profitability and sustainability of the business as well as the long-term prospects.
- Learn and earn – Knowledge is power as we all say. It is essential to understand the business environment, fundamental analysis and market dynamics. Without knowledge, the investment would be a blind game of poker – entirely based on luck.
- Diversify – Diversification is a hedging tool which evens out losses from specific sectors with profitable ones and vice-versa. A direct benefit of diversification is to reduce or eliminate the unsystematic risk, which is the inherent risk specific to the company.
- Patience and Discipline: These two attributes to 90 per cent of the success in long term investing strategy.
- Don’t leverage: Leveraging is a tool to multiply the performance. But it can work both ways, i.e. in profits as well as losses. It is not at all preferable to leverage resources to invest for the long term. There is a regular interest cost which affects the profitability of the investments.
- Regular review: A profitable business does not stay the same till eternity. It is essential to review your investments and understand the market dynamics and industry outlook regularly.
Trading is perceived to be a quick, easy income profession. However, that is not the case. Trading in the stock market is a severe profession involving regular in-depth study, psychological balance, and small capital to start with. A trader heavily relies on technical analysis to scalp the trades. If you wish to become a trader, here are few points to know before starting:
- Knowledge of technical analysis – There are hundreds of technical indicators, but it is crucial to pick what best works for you. Trading is not about copying any strategy but creating your own.
- Discipline and dedication – Discipline is a must-have behavioural trait for a trader. Sticking to the risk-reward ratio and not rushing to trades elongates the trading career. To become a successful trader, consistency is the key.
- Paper trading – Don’t start selling as soon as you gain the requisite knowledge. It is vital to trade on paper before pushing yourself to the live market.
- Avoid emotional bias – Most traders have a psychological trap to stay longer in non-profit trades and exit faster with small profits. An emotional attachment to the trade does not do good to the portfolio of the trader. This is known as loss aversion emotional bias. It means the pain of the loss is twice as impactful as the pleasure of profits.
- Avoid compulsive trading – Many traders tend to trade every day, forcibly. If you don’t have a good setup, just don’t trade. It is more important to decide to not take a trade than to determine when to trade. Compulsive trading wipes out most of the trading profits.
It is essential to understand the mindset and have a clear thought process before entering the stock market. Ideally, one should have a separate trading and investment portfolio or have a clear demarcation of funds, if you want to venture into both.