Incomes are usually of two types: active and passive. Active income is the income generated from a job or a business. Passive income is one where money is generated on behalf of a person. There are several avenues of passive income, and stock investment is one of them. Historically, stocks have delivered the best returns out of any asset class. That is why it is considered the best long-term investment by many experts though it carries high risks.
Here is a detailed guide on share market investments in India.
Making money work with passive income
Passive income simply means money working on behalf of an individual or an organization. It is an income source where the active participation of an individual is not required, and the money invested itself generates revenue over time. There is a common saying that if people cannot make money working for themselves, they will have to work till their death.
There are several ways of generating passive income like share market investments, real estate investments, peer-to-peer lending, etc. Trading or investing in a stock market is the most affordable and well-known avenue for generating the highest passive income possible. Anyone can start trading stocks by opening a Demat account along with a trading account.
One can start trading on leverage (borrowed money) by paying a marginal amount of money. This facility is called margin trading and it is offered by many stockbrokers. It allows a trader to buy company stocks by paying a small margin as the remaining sum is paid by the broker. It offers to pay to make one’s money work with a small initial amount.
How to invest in the stock market?
One can find investing in a stock market a bit confusing because of several technicalities involved with it. At the same time, an individual must possess a minimum of knowledge before making an entry into the share market. Listed below is the complete step-by-step guide for an individual who is willing to invest in shares:
- Determining the investment strategy
Firstly, an investor must determine his/her investment strategy based on their financial goals. Based on their requirements, expertise and objectives, investors are required to take a call on whether would stay invested for the long term or trade shares for quick profits.
- Deciding the investment amount
An investor willing to invest in a stock market must choose an investment amount based on his/her disposable income. It is recommended that one should always invest money, which will not be required within the span of a minimum of five years. Having an investment strategy helps greatly in this regard.
- Demat and trading account
A Demat account and a trading account are necessary for stock trading in India. A Demat account holds securities in the electronic format while a trading account allows investors to place buy and sell orders.
- Analysis of the stock
Investing in the stock market without any sort of research is almost like gambling. Therefore, one must carry out adequate research and analysis. Fundamental analysis is necessary to choose stocks for long-term investment. For trading, one must learn technical analysis.
- Transaction execution
Post analysis, the investors, or traders need to execute the transaction whether it is day trading, swing trading, scalping, or a long-term investment.
- Portfolio monitoring
After the transaction, an investor needs to keep regularly monitoring his/her portfolio. It will help to understand the performance of an investment, figure out the stock potential, reduce losses, etc.
- Staying updated with the changing trends
Market fluctuations take place due to the increase or decrease of the share prices of listed companies. It is important to understand and interpret the direction of a particular company’s stock and the overall market.
Points to consider before investing
Before investing in stocks, one should carefully consider these factors:
- Risk appetite: Risk-bearing capability or risk appetite is one of the key factors to consider before investing in a stock market. Conservative investors with a comparatively low-risk appetite may choose to invest in stocks that provide stable returns which are less impacted by market volatility.
- Diversification: While investing in a stock market, one should always create a diversified portfolio. Investors should avoid investing a significant amount in a single company’s share or several shares belonging to the same sector. There is a popular saying that one should not keep all their eggs in one basket.
Share market investment is one of the most important avenues of building wealth over some time. Fluctuations and volatility are one of the most common phenomena in the stock market. Therefore, preferably one must remain invested for a long period to average out all such fluctuations.
In case it becomes difficult to select company stocks for investments, one can reach out to investment advisors, wealth managers, financial planners, etc. and seek their advice.