How to Earn Money in the Share Market

September 13, 2021 Trading 6 min read

While the share market may appear complex, its potential for earnings often motivates many people to begin investing. Patience and thorough research of market trends and company financials are necessary before starting to buy and sell shares. As long as investors understand the risks before going in, the share market can be a great way to earn money. Let’s take a look at what the share market is, how to earn money in the share market, and what pitfalls investors should watch out for.

What Is a Share?

Shares are pieces of ownership in a company that investors can purchase on the share market. The terms “stocks” and “shares” are often used interchangeably. Technically, “stock” can refer to a broader category of securities, including shares, bonds, and mutual funds.  Public and private companies can issue shares. Shares of private companies are not available on the stock market, while shares of publicly listed companies are. This means the general public can typically only buy shares of publicly traded companies.

What Is the Share Market?

The share market or stock market is a platform where investors can buy and sell shares of publicly traded companies. These companies have gone through a formal process to list their shares on a stock exchange. The share market is typically open for specific trading hours, which vary depending on the market.  In India, the share market is regulated by the Securities and Exchange Board of India (SEBI), which sets guidelines for share trading and establishes requirements for companies to be listed on exchanges.

Types of Share Markets
There are 2 main types of share markets:

Primary markets: This is where a company issues shares for the first time. This generally takes the form of an Initial Public Offering (IPO). This is an extensive process by which the company becomes publicly listed and its shares become available to the public for trading.

Secondary markets: This takes place after the company has become publicly listed. Here, investors can buy and sell shares from other investors. The more actively a stock is traded in the secondary market, the more efficient this market is. This leads to more accurate stock prices and more liquid shares. 

A strong primary market is important for companies to raise capital, but a strong secondary market is what motivates investors to buy shares initially.

How to Earn Money From the Share Market

Long-Term Investments
This involves making money by buying shares at lower prices and selling them after their prices increase. The key here is to pick companies that are fundamentally strong and have long-term growth potential. As the company grows, the value of its shares and the price may increase. This allows investors to make money from share price appreciation on an annual basis.

This strategy offers an alternative to short-term trades that capitalise on small price fluctuations. Short-term traders often need to monitor the market closely and end up spending more on fees. As a result, holding shares for the long term can be a more attractive approach.

Dividend Reinvestments
Dividends are one of the most common ways shareholders make money from the market. They are periodic payments made to shareholders that depend on company profitability. By investing in dividend reinvestment plans (DRIPs), shareholders can use their dividends to buy more shares of the company. This can have a compounding effect and contribute to building long-term wealth. 

The type of reinvestment plan will depend on the brokerage as there are a wide variety of plans to choose from.

Intraday Trading
This is a short-term strategy where traders buy and sell shares within the same day or several days or weeks. The period is short as they aim to make profits from short-term price fluctuations. This strategy is generally employed by more experienced traders as it involves a thorough understanding of the market and being able to read price changes and trends well. 

Successfully monitoring the market and predicting stock price fluctuations can be very tricky, however, if done right, it can give way to significant short and medium-term gains.

Investing in Growth Shares
These are shares that are expected to grow at a faster rate than the market average. They are characterised by their potential for significant capital appreciation. They tend to reinvest profits to bring about rapid expansion. These shares are attractive to investors who prefer a higher risk-reward tradeoff. 

These are some of the common ways investors can make money from shares, however, take into account individual goals before deciding on the strategy. 

What to Keep in Mind When Investing

Diversification
This is one of the most important tips for successful investing. In essence, diversification means not putting all your eggs in one basket. This can take the form of investing in a wide variety of companies, industries, sectors or even types of assets (like stocks, bonds, and mutual funds). It helps reduce the overall risk of an investor’s portfolio by ensuring that not all their capital is tied up in one type of stock. If one company’s stock falls or if a sector experiences trouble, it can be balanced out by the performance of other stocks or sectors in the portfolio.

Independent Investment Decisions
One mistake new investors make is to blindly follow other people’s investment decisions. This may not only negatively affect their portfolio but can prevent the constructive learning that comes from trial and error. The shares an investor chooses will depend heavily on their individual investment goals, risk appetites, and expertise, among other factors. What works for one investor may not work for another. 

It is important to stay away from popular trends or mass-produced investment advice. Instead, do individual research and make investment choices independently or by consulting a financial advisor.

Risk Management Techniques
Diversification is not the only way an investor can reduce the risk associated with their portfolio. Many other risk-reduction strategies can be used to protect profits and reduce potential losses. Setting stop-losses and trailing stops are great examples of how you can protect your portfolio gains.

Realistic Expectations
Patience and timing are 2 very important parts of successful investing. Many investors set large and unrealistic targets that can lead to significant losses as they pursue them. Make sure to analyse potential investments well and back up predictions with other indicators and information. 

What Prevents Investors From Making Money?

Investing can be complex as many factors play into how profitable an investor will be. Some of these are:

Lack of Knowledge
Not conducting proper research before investing can lead to a weaker understanding of the market, financial instruments, and companies. Investors may have unrealistic expectations and wait for share prices to rise before buying or rely too much on stock price predictions. This can get in the way of investment profits and result in missing out on important opportunities.

Panic Selling
Many investors panic when share prices fall. These may not always be due to company-specific factors and could be because the market is experiencing trouble. In many cases, it’s better to wait instead of reacting to short-term fluctuations and potentially missing out on future opportunities.

High Fees
This usually happens with short-term trading strategies as they involve repeated buying and selling of shares to take advantage of price changes. Management fees associated with private or public funds can also eat away from investors’ profits over time.

Emotional Decision-Making
Greed is one of the most common emotions that cause bad investment decisions. Fear of losses is another dangerous emotion when investing. These cause investors to act impulsively and can get in the way of rational decisions.

Lack of Diversification
Overconfidence in one specific share or sector can lead to significant losses if it does not do well. Diversification is said to have a very low cost to investors but can go a long way in reducing portfolio risk.

Conclusion

Overall, there are many ways investors can earn money from the share market. It is important to research companies or sectors well and prioritise independent decision-making before starting. Diversifying, employing sound risk management techniques, and setting realistic expectations are some important factors every investor should consider. There are a wide variety of strategies they can employ which will depend on individual investor goals and risk appetites. 

There is no one-size-fits-all approach to the stock market. However, through comprehensive research and trial and error, investors can learn a lot about successful investing.

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Disclaimer: This article is for information purposes only and should not be considered as stock recommendations or advice to buy or sell shares of any company. Investing in the stock market can be risky. It is therefore advisable to research well or consult an investment advisor before investing in shares, derivatives or any other such financial instruments traded on the exchanges.

FAQs

How do you start investing in the share market?

The first step typically involves choosing a registered broker and opening a Demat account (for holding shares electronically) and/or a trading account (for buying and selling shares). Conduct thorough research and choose a good broker whose features align with your investment goals.

Are trading and investing differently?

Trading, or specifically intraday trading, is when investors try to profit from short-term price fluctuations. Investing is a long-term strategy where they aim to profit from capital gains and price growth. The strategy an investor may pursue will depend on their expertise and risk tolerance.

What are the types of share markets?

There are 2 main types of share markets: primary and secondary. Primary markets are where companies issue shares for the first time through a process called an Initial Public Offering (IPO). Secondary markets are where investors can buy and sell shares of already publicly listed companies from other investors.

What are the different strategies to make money from shares?

There are many strategies investors may use. These include:
– Value Investing
– Growth investing
– Dividend reinvestment
– Day trading
– Buy and hold strategy
There are many more strategies and each has its risk profile and requires careful consideration of market conditions.

Which shares are the most risky?

Shares of small and mid-cap companies are perceived to be more risky than those of large-cap companies. Growth companies, which focus on rapid expansion, are also generally considered riskier than value companies with a focus on stable financials.  However,  risk also depends on the specific company’s financial health, industry, and overall market conditions.  Always conduct thorough research before investing in any company.


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