It is often said that patience is a virtue. This virtue manifests itself in many ways especially when it comes to wealth building. Wealth building does not have any quick-fix solution, unless one is lucky enough to win a lottery or sweepstakes, but this is a once in a lifetime event that happens to a very few, for others, it is the sum total of intelligent investments, patience and a bit of luck to build wealth.
Historically, stocks have averaged an annualized return of 10% with peaks and troughs of different measures, however in the end; stock markets have stayed ahead of inflation, which means that the money investments have physically grown. A lot of good companies also pay dividends to their shareholders. These payments can provide regular investment income and thereby enhance returns.
Start Investing in the Stock Market and Building Wealth
In addition to capital appreciation and dividend income, the other advantages include advantageous tax treatments wherein the income generated on the sale of equities is taxed at special lower rates than normal income tax rates. The shareholders also have voting rights which means that they own a part of the company and the most important fact is liquidity.
This means that shares can be bought and sold more quickly and easily than other investments, such as real estate, art, or jewellery. This also enables the investors to buy or sell their investment for cash with relative ease.
Having seen the advantages, it is also important to understand the disadvantage related to stock investments. Stock markets are volatile and dynamic. Share prices spike and plummet multiple times within a single day. There can be unpredictable fluctuations in the investment markets, thereby presenting risks to investments. In the event of stock market crashes, the recovery time is unpredictable.
With the Pros and cons in perspective, it is time to see the aspects that one needs to know in order to start investing in the stock market and building wealth. Here is the list of important aspects:-
1. Long-term Strategy:
Stock investments are always for the long term. Short-term money can be made in the stock market through the aspect called speculative trading, however, the associated risks are far too many especially for the beginners.
2. Goal-based Investments:
Before investing one must know individual goals and the likely time one may need the funds in the future. As already advised, investing in the stock market for the long-term is the only way to fetch good returns, short-term volatility may notionally wipe off all the accrued gains hence setting an investment horizon is needed.
3. Risk & Rewards:
If one is perturbed by the daily volatility of the stock market, it is better to invest in debt instruments and take less efficient gain which get gobbled up by inflation. Risk tolerance is the key to wealth creation. This aspect is greatly affected by one’s perception of the risk as well as by understanding one’s risk tolerance. One needs to skip those investments which are likely to make one anxious.
4. Emotional Control:
This is linked to risk tolerance but is more nuanced. Simply speaking, one is bound to be emotional and overwhelmed when starting to invest in the stock market since earning substantial returns may make one feel elated and similarly losing money may hurt.
The perception of losing/gaining money may force one to exit the market too quickly or enter the market at its peak. In both situations, one would lose money. One should learn to never make investments based on emotions.
5. Identifying one’s Investment style:
Before one is ready to commit money into the stock market, one needs to introspect and answer the question, what kind of investor am I? Normally before opening a brokerage account, the service providers enquire about investment goals and how much risk one is willing to take.
Some investors want to actively manage their money, some prefer to “set it and forget it” while some may want trained managers to manage their money. All online brokers allow investments in stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds through their portals in a manner suited to the investment styles of individual clients.
6. Choosing a Broker:
There are several types of brokerage services providers with a range of services. Gainful investing requires one to use a brokerage service that aligns with individual investing goals and learning approaches. For new investors, it can mean the difference between a new income stream and a disappointment.
First-time investors have a limited amount of capital and hence a limited risk-taking capacity. This makes it unreasonable for them to pay huge amounts to traditional brokers as brokerage fees.
They should rather stick to discount brokers and make the most of cheap brokerage rates, no matter what the order quantity is. As they grow in experience and in a position to explore more facets like derivatives, margin trading, etc., they could shift to traditional brokerage accounts.
7. Types of Investment Avenues:
This is a basic aspect of investing in the stock market. There are several products available ranging from equities, Mutual funds, Debt instruments, derivatives, exchange-traded funds, Index funds, etc. depending upon investment style and needs, one needs to carefully choose the investment avenues.
For the risk-takers, equity investment would be an ideal instrument to getting excellent returns but for a risk-averse, debt instruments provide the safest avenue. For investors who lack the means of active investments in terms of time, may choose Mutual Funds.
Investment diversification protects the money from adverse stock market conditions, it is advised that investors must invest money in the various assets as mentioned in the preceding paragraph i.e. diversify their investments. It protects the investor from losing all assets in a market collapse. A diversified portfolio also provides an almost steady return in turbulent market conditions.
Here it is advised to invest in various sectors rather than putting all your money into a single sector. Explore various sectors such as Real Estate, Pharmaceuticals, Telecom, and more. This will protect your funds and also will lead to financial growth in the long term.
Never invest with the expectation of earning quick returns, it is better to be patient and start your investment. This is the basic mantra for successful investors. Take some risks but not to the extent of losing all your money.
The bottom line here is that it is possible to start investing with little money. Take your time to learn the basics, do your homework on what is the right investment for you, and be aware of what kind of risks you are taking. Take the financial advice of experts wherever needed. It is also important to note that you wouldn’t be making profits straightaway. Happy investing!