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The stock market may seem intimidating and confusing. You are going to be investing your hard earned money and expecting good returns. However, there are some things to keep in mind before you start investing.
1. Be prepared
Before you take the plunge you need to know how to invest in stock market. Ensure that you have determined the following things:
â€¢ Choose your options: The most important thing to determine is the type of stocks or company that you will be investing in. You may go for the companies on the Nifty 50. You may also choose among small-, mid-, and large-cap companies.
â€¢ Set your budget: Analyze your finances and determine your budget and the amount of money that you will need to get your desired returns.
â€¢ Open an online trading account: A dematerialized account is necessary for trading in the stock market. It will be better to open an online trading account because you will be able to trade from anywhere and at any time.
â€¢ Broker: You may seek help from a broker or a consultancy service in case you are wondering how to invest in shares. A broker is required to carry out any stock market transaction.
2. Analyze the company
Now that you have the basics covered and you are ready to invest, you have to choose which company you will invest in. For determining your best bet, you may do a fundamental analysis. This method basically helps you in determining what the intrinsic value of the companyâ€™s stock is. If the intrinsic value is more than the amount it is being traded at currently, then it is a good idea to invest in that company.
The intrinsic value is the total amount of future profits that the company is projected to make. This practice of fundamental analysis is a good way to determine the stocksâ€™ value that will increase in the future and give you a good return in the long term.
3. Ratio analysis
Ratio analysis is another way that will help you to know the performance of the company that you are going to invest in. This method allows you to measure different companies of the same industry and select the one that is performing the best.
There are some ratios that you may use to determine the performance of your chosen company. These are:
â€¢ P/E ratio: The price to earnings ratio determines how much an investor is paying for each unit of the earnings.
â€¢ Debt to equity ratio: This ratio compares the level of the amount that is borrowed to the level of the capital.
â€¢ P/BV ratio: The price to book value ratio helps in comparing a company’s market price and its book value. Book value is the amount that remains when the company liquidates its assets and repays its liabilities.
â€¢ OPM: This ratio determines the operational efficiency of the company and its pricing power. It is known as Operating Profit Margin.
â€¢ EV: Enterprise value by Earnings before interest, tax, depreciation and amortization (EBITDA) is used along with the P/E ratio to determine the value of a company. EV is basically the market capitalization added with debt and subtracted with cash.
4. Other tips to keep in mind
There are a few other tips to keep in mind to help you know how to invest in stocks and get a good return on your investment.
â€¢ Do not go by the herd mentality: Your decision to invest in a particular stock should be made by yourself on the basis of careful evaluation. It is better to avoid the herd mentality and end up buying the shares that your cousin, neighbor, or colleague is buying without any research.
â€¢ Invest in the business not just the stock: It is better to invest in a business that you understand so that you will be able to gauge how market conditions will affect your investment. Buying the stock of a company whose working you donâ€™t understand may leave you feeling out of the loop.
â€¢ Be disciplined: It is very important to have a disciplined approach when it comes to investing. Getting swept up in the volatility of the market might result in losses. If you systematically invest and hold onto your investment patiently, it is more likely that you will get great returns.
â€¢ Diversify: The importance of diversifying your portfolio cannot be stressed enough. By diversifying and buying different types of securities, you lower your risk and increase chances of a stable return.
Follow these tips mentioned above and start investing today for better returns.
Investing in the Stock Market Made Easy
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