5 tips to invest in the stock market

If one has the money and drive to grow their income, the stock market is one of the top of mind options for many investors.

Of course there are some who prefer keeping it safe with Fixed Deposits and Life Insurance, and get fixed returns.

But there are many out there who believe it's worth taking the risk of investing in stocks because of the high intensity returns it can yield.

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Sure, the stock market can be a good place for you if you back up your decisions by thorough research and market understanding, and you're all set to trade in the stock market.

Here are some tips we feel will enable you to understand how you can make this work for you.

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Choose the right broker

Firstly, start with a broker with who charges reasonable brokerage. You can always go for the one that offers the lowest brokerage, provided there are no hidden costs involved.

Make sure your brokerage firm has its research well in place, so that you can seek advice from them from time to time.

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A listed broker will be a safer option for you, as it will be in the close scan of the regulators.

See if it has been recognised for any of its achievements and make sure they have stable and established client base.

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Diversify your portfolio

Avoid concentrating all your money in a single stock. Try and diversify across stocks by capitalisation (small, mid, and large caps), sectors, and geography.

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This is mainly because not all categories fluctuate at the same time. So, if you happen to lose out one particular stock, you can recover it from the safer and reliable stocks and bonds.

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Do your research well

Unlike mutual funds, where portfolio managers invest on your behalf, here you are your own fund manager.

You must have sound knowledge of the market conditions, trends and must regularly do an analysis on stock performance.

It will be an added advantage if you understand basic accountancy principles to interpret annual reports and stock history of a company.

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This way you won't end up going by hype and buy and sell shares plainly due to hear-say. You will genuinely understand why stock prices are rising or falling and hence take better decisions.

For example, you can spot genuine buying and selling if large volume trade transactions have been made during a wider period.

On the other hand if majority of transactions are made by day traders or speculators, it may not be the best idea to invest there.

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Stay vigilant

Keep a check on your contract note. Make sure it has the order and trade number, trade time, quantity, price and brokerage, and signatures of the concerned authorities. 

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If you have an online broker, keep a check on your depository participant account. After putting in your buy order, your shares must reach you on the second day.

Similarly, when you sell the cash must be in your account by the second day after settlement if you do not have a running account with your broker.

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Document everything

Documenting what you do will only ensure safety and security of your money. File the contract notes safely, if you are buying and selling through a broker.

Keep a copy of your application form and cheque if you are applying for an IPO. By keeping your documents in place, you avoid any kind of fraud and spot it on time.

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At the end, trading is all about doing your research well and taking logical decisions.

Decisions taken out of sheer temptation may lead to unnecessary loss, which can be avoided if you understand what you're doing. 

Milan Parekh, CMD, Action Financial Services India Limited (AFSIL) is a Mumbai based BSE listed stock broking firm, incorporated in 1992.