TomorrowMakers

How to invest in stocks like a pro

There are certain things to adhere to when you begin investing in the stock market

Here’s a complete guide to investing in stocks

If you are a woman with no academic or professional background in finance, does it mean personal wealth creation is something you shouldn't bother with? Not at all. On the contrary, there's absolutely no reason why you should not think of growing your wealth for yourself. In fact, you should start thinking of investing in stocks – like a pro.

Ground rules

There are certain basic rules you should stick to when you begin investing in the stock market:

  1. Be clear in your mind about your capacity to take risks
  2. Make sure your investment won’t affect your daily life; it would be disastrous if you decide to invest the money kept aside for your daughter’s education.
  3. Stick to a chosen strategy – it is disciplined investment
  4. Don’t invest all your money at once; start small and gradually expand your exposure in the market. Instead of trying to be an overnight success you should have at least a two-year horizon when investing in the stock market
  5. Avoid buying stock on the advice of friends, office colleagues, and acquaintances who might be as much a newbie as you are
  6. Always understand the investment product you’re investing in
  7. Finally, reduce your risks through diversification of your investment portfolio

Setting goals

Before you rush headlong into investing, a word of advice: it will help if you begin with a goal-based vision. For it is when you set goals that you set yourself on the path to disciplined investing. You could start by setting some personal goals, such as having to repay your student loan, buying a flat or a car, or raising your wedding expenses. This way, you have a purpose.

Also, set the time horizon for each goal; that is, fix the time frame by when you would like to achieve the goal. The short term would be less than three years, medium term between three and eight years, and the long term more than eight years. So, if your aim is to create a nest egg for retirement, you should be giving yourself a longer time frame than if you are saving up to fund an overseas education.

Merely setting goals is not enough; you must also set individual target amounts. In other words, you must work out how much money you need to fulfil each goal. Do not forget to factor in inflation. Then, finally, decide on the investment goal, depending on whether you want capital appreciation or regular income. For this, you will have to take into account your age and the length of time you will be able to work.

Stockbroker options

Buying stock is not like buying something from a grocery store; you cannot simply walk into a stock exchange and buy the stocks of your choice – only a registered broker can do that. There are two types of brokers you can approach: full-service brokers and discount brokers.

Full-service brokers are traditional brokers who will provide you with advisory services and trading facilities, charging a commission on every trade you execute, usually 0.3-0.5% on each transaction. Frontline full-time brokers include affiliates of many leading banks.

Discount brokers, sometimes also called budget brokers, will provide you with trading facilities but no advisory services. Their brokerages are lower, usually a flat Rs 20, irrespective of the number of shares or their prices. Basically, you are on your own with discount brokers, who charge less, while the traditional, full-service brokers, who charge more, will provide a bouquet of advisory services.

Decide carefully, for the difference in brokerage can be a lot; a full-service broker might charge brokerage of Rs 2500 for investing in a thousand shares of Rs 500 each for you, while a discount broker will take Rs 20. The question is, as an amateur and a newbie, should you mind paying this difference?

Investment strategy

When investing, it makes sense to consider mutual funds, which are professionally managed investment funds that pool money from many investors to invest in securities. For someone who’s a beginner like you, there are several advantages of investing through mutual funds.

First and foremost, experts decide where to invest your money – that is a big headache taken care of. Secondly, a mutual fund ensures diversified portfolio investment as your money will be spread over multiple shares/bonds.
Then, mutual funds are a highly flexible investment option, as you can invest any amount of money at any time. Concurrently, they are also highly liquid – you can convert the investment into cash in 1-5 business days, depending on the fund. Moreover, it is transparent; you know where your money is being invested.

Yes, you have to pay a management fee, also called the ‘expense ratio’, which mutual fund companies charge to cover operating costs. This is generally 2-2.5% of the assets that are being managed. If this bothers you and you do not wish to pay the management fees, you can invest in equities directly.

As against a payout in the form of management fees, you can expect inflation-beating returns. If you stay invested in a type of mutual fund called ELSS (equity-linked savings scheme) for more than five years, your returns can be in the range of 12-18%. Moreover, if you are invested in ELSS for three years, you will get tax benefits under section 80C for up to Rs 1.5 lakh. Plus, the lock-in period is only three years, compared to five for ULIPs and FDs, and 15 for PPFs.

Last words

Investing in the stock market is the wrong way to go about it if you’re looking to get rich quick; it is a long process and entails hard work, and one is always learning, sometimes through trial-and-error. One great advantage of stock trading is that it lasts a lifetime – strategies used two decades previously can still be utilised successfully. If you have the patience and the perseverance, success will come your way.