How To Make Money In Stocks – Forbes Advisor INDIA

Ask any financial expert and you’ll hear that stocks are one of the keys to long-term wealth accumulation. The difficult thing about stocks, however, is that while they can increase in value exponentially over years, their day-to-day performance cannot be predicted with absolute accuracy.

This begs the question: how can you make money with stocks?

Actually, it’s not difficult, as long as you follow some best practices – and be patient.

1. Buy and hold

There is a common saying among long-term investors: “The time in the market is better than the timing of the market.”

What does that mean? In short, a common way to make money from stocks is to use a buy-and-hold strategy, where you hold stocks or other securities for a long time rather than buying and selling frequently (aka trading) .

That’s important because investors who regularly enter and exit the market on a daily, weekly, or monthly basis tend to miss opportunities for strong annual returns. Don’t you think so?

Consider this: According to Putnam Investments, the stock market returned 9.9% annually for those who remained fully invested over the 15 years through 2017. But if you’ve been in and out of the market, you’ve jeopardized your chances of those returns.

• For investors who missed only the 10 best days during that period, their annual return was just 5%.
• The annual return was only 2% for those who missed the 20 best days.
• In fact, missing the 30 best days resulted in an average loss of -0.4% per year.

Not being in the market on the best days clearly results in significantly lower returns. While it may seem like the simple solution is to always make sure you’re invested on these days, it’s impossible to predict when that will be, and days of strong performance sometimes follow days of big falls .

Continue reading: How to invest in US markets from India

That means you need to stay invested for the long term to ensure you’re hitting the stock market at its best. A buy and hold strategy can help you achieve this goal. (And more importantly, it helps you beat tax time by qualifying you for lower capital gains taxes.)

2. Opt for funds instead of individual stocks

Seasoned investors know that a good investment practice called diversification is key to reducing risk and potentially increasing returns over time. Think of it as the investing equivalent of not putting all your eggs in one basket.

Although most investors are drawn to two types of investments — individual stocks or mutual funds like mutual funds or exchange-traded funds (ETFs) — experts typically recommend the latter to maximize your diversification.

While you can buy a number of individual stocks to replicate the diversification you automatically find in mutual funds, it can take time, a good deal of investment acumen, and a significant cash commitment to do so successfully. A single share of a single stock, for example, can cost hundreds of dollars.

With funds, on the other hand, you can gain exposure to hundreds (or thousands) of individual investments with a single stock. While everyone wants to put all their money into the next Apple (AAPL) or Tesla (TSLA), the simple fact is that most investors, including the pros, don’t have a strong track record of predicting which companies will produce outsized returns.

For this reason, experts recommend that most people invest in funds that passively track major indices, such as the NSE Nifty or BSE Sensex. This puts you in a position to take advantage of the stock market’s approximately 10% average annual returns as easily (and cheaply) as possible.

3. Reinvest your dividends

Many companies pay their shareholders a dividend — a regular payment based on their earnings.

While the small amounts you receive in dividends may seem negligible, especially when you’re first starting out investing, they’re responsible for a large part of the stock market’s historical growth. Nifty 50 has returned around 12% since inception and dividend reinvestment, but the percentage has climbed to nearly 16%. That’s because you’re buying more shares with each dividend reinvested, which helps your earnings add up even faster.

This improved compounding is why many financial advisors recommend long-term investors to reinvest their dividends rather than spend them when they receive the payments. Most brokerage firms offer you the option of automatically reinvesting your dividends by signing up for a dividend reinvestment program, or DRIP.

4. Choose the right investment account

While the specific investments you choose are undeniably important to your long-term investing success, the account you hold them in is also critical.

That’s because some investment accounts give you certain tax benefits, like the National Pension Scheme (NPS). This allows you to avoid paying taxes on any winnings or income you receive while the money is held in the account. This can boost your retirement savings because you can tax those positive returns for decades.

The minimum amount required to open an NPS account is INR 500 and each subscriber can have a maximum of one account.

NPS Tier I is a tax-exempt investment, exempt from tax at all stages of investment and return. The amount invested, the interest earned on it and the total amount withdrawn at the end of the program are tax-free. After the age of 60, up to 60% of the total investment can be withdrawn. This 60% investment is considered tax-free.

Of course, there are certain circumstances, such as B. onerous medical expenses or dealing with the economic fallout of the Covid-19 pandemic that allow you to tap into that money early without penalty. But the rule of thumb is that once you put your money into a tax-advantaged retirement account, don’t touch it until you’ve reached retirement age.

Meanwhile, plain old taxable investment accounts don’t offer the same tax incentives, but you can withdraw your money whenever you want, for whatever purpose. This allows you to take advantage of certain strategies such as: B. Collecting tax losses, where you turn your loss-making stocks into winners by selling them at a loss and receiving a tax rebate on some of your gains.

All of this means you need to invest in the “right” account to maximize your returns. Taxable accounts can be a good place to park your investments, which typically lose less tax income, or for money you’ll need over the next few years or decades. Conversely, investments with the potential to lose a larger chunk of your tax returns, or those you plan to hold for the very long term, may be better suited to tax-advantaged accounts.

Most brokers (but not all) offer both types of investment accounts, so make sure the company you choose has the type of account you need. If this isn’t the case for you, or you’re just starting your investing journey, check out Forbes Advisor’s list of the best brokers to find the right choice for you.

The final result

If you want to make money in stocks, you don’t have to spend your days speculating on which stocks of each company might rise or fall in the short-term. In fact, even the most successful investors like Warren Buffett recommend investing in low-cost index funds and holding them for years or decades until you need your money. Unfortunately, the proven key to successful investing is a bit boring. Just have patience that diversified investments like index funds will pay off in the long run instead of chasing the latest hot stocks.