Many of us are highly suspicious about the stock market because most of the people know stock market as a gambling place. Of course, there are many who have made a fortune in the market, but their success is seen as a miracle or something that has happened by fluke.
Average person is confused about the stock market and doesn’t want to understand it either. So here is my humble effort to introduce you to the basics of stock investing. While the field of stock investing is very wide, following points will explain you how you use the stock market into your favour.
- Like any other field, mastery in stock investing comes when you commit to becoming a life-long learner of it. Not surprisingly, all renowned stock investors are also avid readers and learners.
- Stock investing isn’t about making quick gains in the short term ; that’s stock trading. Traders have a different approach to the stock market & use the “tools of leverage” in the stock market. As a stock market investor, you must stay away from daily trading.
- Investing is all about tilting the odds in your favour as much as you can. It’s not just about profits; it’s also about protecting your capital.
- Many companies, big and small, trade on the market and you can buy their shares. Shares are nothing but ownership interests in businesses. Technically, you become part owner of the business. If the business does well, the stock will appreciate. That’s what stock investing is at its core. Nothing more, nothing less.
- Don’t scares by market volatility – means ups and downs of the market. In the short term, the market may look difficult to navigate, but in the long term (five years or more) what eventually gets rewarded is how well the business has done over time. This means that if you are invested in good businesses over the long term, you can make serious money.
- The main difference between debt and equity is that while the former stands for ‘lending’, the latter means ‘ownership’. By investing in a debt instrument, you are effectively lending money to the debt issuer on interest. When you lend money, you can’t expect to earn more than the interest rate. But when you invest in stocks, you become part owner of the business. If the business does well, your returns have no upper limit.
- Good businesses, right valuations and long-term focus will give you always handsome return. If picked well, stocks can do wonders beyond your imagination.
- Value investing is the real form of investing. It requires you to find good companies available at a bargain. Why are they at a bargain if they are really good? The stock market chases the fashion of the day. Those stocks that get ‘out of fashion’ are ignored by the market. And that’s exactly why you should pick the best among them. Such stocks are available at a bargain. Later when the market recognises their potential, they get rerated and deliver gains.
- Value investing is not just a logical way of investing in businesses, it’s also comparatively ‘safer’. You buy stocks at low valuations and this acts as a safety net if the market itself falls. In market declines, expensively valued growth stocks tend to correct heavily and can give investors sleepless nights. Value investing is essentially long-term investing as the realisation of value happens over the long term. This is why you should have a time horizon of at least five years when you invest in stocks.
The successful investor is usually an individual who is inherently interested in business problems. So I say that if you following the above principles & invest into the good companies stocks which are available at a bargain then you are not in financial ruins and can build wealth in future.
