+The myth that stock markets are not for all is fast being broken as more and more investors are seen taking a plunge into the market. During the pandemic especially, markets saw huge corrections, despite this, it is also a fact that this period saw the maximum influx of investors than ever before.
What is the main aim to dabble in stock markets? Obviously, earn good returns and have an alternate source of income. Given below are a few pointers that can help understand how stocks can generate money for investors and what are points to watch out for in order to make a successful portfolio.
What are the investment options in stock markets?
When we talk about investment in stock markets, investors have an array of options today. Gone are the days when stocks were the only investment category. Today investors can invest in many dynamic products like different types of mutual funds, ETFs and their various classes, gold bonds, corporate bonds, etc. Another option available for earnings through stock markets is trading. Investors can trade in traditional stocks, futures and options, forward contracts, and swaps in the secondary markets.
What stocks help you earn money?
The key question for every investor and trader is how they can make money through stock markets. Below are the two main ways an investor or trader can earn money through stock markets.
- Capital gains
Capital gains are the returns or the profits that an investor gets from the sale of their investments. These gains are further classified into long-term and short-term gains depending on their period of holding and the asset class. The taxation of stocks and mutual funds, in general, is tabled below.
|Type of asset
|Short term gains
|Long term gains
|Equity and equity-related instruments (stocks, equity mutual funds, equity-oriented hybrid funds, etc.)
|Less than 12 months
|15% (plus cess and surcharge)
|12 months and more
|Exempt up to Rs.1,00,000Above Rs.1,00,000 taxed at 10% (plus cess and surcharge)
|Debt and debt-related instruments (debentures, bonds, debt mutual funds, debt-oriented hybrid funds, etc.)
|Less than 36 months
|Slab rate of investor
|36 months and more
|20% (plus cess and surcharge)
Dividends are the share of profit that the shareholders are entitled to receive. The company declares dividends on a per-share basis after approval from its AGM. Shareholders eligible to review the dividends as on the reporting date are then notified of the dividends to be received. These dividends are taxable in the hands of the investors and are taxed based on their applicable tax slabs.
Starting from the Financial year 2020-21, any dividend received in the hands of an investor is now subject to be taxed at the individual’s slab rate. TDS is deducted if the dividend payable is over Rs 5000 by any single company.
What are the points to remember regarding the same?
Now that we have seen the two main ways to earn money through stock markets, let us now see a few key points to consider to have a successful portfolio and avoid significant losses.
- Have basic knowledge of the market and its fundamentals
The start of any business opportunity or anything, in general, should be thorough research relating to the same. Investors and traders need to have a thorough idea of the nitty-gritty of the stock markets and their related concepts. It is also important to understand concepts like fundamental and technical analysis to understand which stocks to pick and when to enter and exit the market in general.
- Know your risk-return perception
Every investor has a different risk-return perception and hence every portfolio varies differently. It is therefore important to not imitate a portfolio blindly and make your own way. For this, the investors first and foremost need to understand their own returns perception and their risk appetite. This will help them curate a portfolio that suits their needs and is able to meet their financial goals in a better manner.
- Know your investment goals
Stock markets, especially mutual funds, have many investment options that can be suitable based on a person’s financial goals like retirement, funding a child’s education, etc. Therefore, it is important to first set the investment goals and invest accordingly.
- Invest early and regularly
The golden rule of investing in stock markets is to invest early and also to invest regularly. By investing early and regularly, investors can have the maximum benefit of compounding which is the key to higher returns.
Another key to having a successful portfolio and making money is diversification. By diversifying the investment portfolio we essentially spread the overall risk of the investment. Therefore, if one segment of the market is underperforming, it can be compensated by other segments or investment products that are able to generate better returns.
- Avoid herd mentality
Herd mentality is one of the crucial factors for the downfall of many investors and traders. Most investors tend to follow the portfolio of market stalwarts in the hope to make money similarly. While this can be true to some extent, blindly following an investor’s portfolio or advice can be quite risky. It is prudent to analyze the markets individually to access and determine the best course of investments based on individual perception.
- Don’t rely on emotions while making an investment decision
Relying on emotions in making investment decisions is not optimal. If an investment is no longer able to generate decent returns it is better to make a timely exit rather than continue to make losses. Decisions taken emotionally may be dragging your portfolio down and not letting you earn to your full potential.
Stock markets have become a very attractive source of income for millions today, especially the younger generation. Investors today are more informed and understand the markets better, therefore, they are not afraid to take a little risk. This has led many investors and traders to make income from stock markets but only their secondary but also often their primary source of income.
Long-term gains from equity or equity-related instruments are taxed at a flat rate of 10% without the benefit of indexation. An initial exemption up to Rs.1,00,000 in LTCG is allowed as per income tax laws.
Trying to time the markets is quite futile as even most experts with years of experience can get it wrong sometimes.
No. Stock markets are highly volatile, hence, it is always a chance that investors lose all their life savings in them. Therefore, it is advisable to invest only surplus funds in stocks so they do not harm the routine financial obligations and their survival.
The most common strategy adopted by traders to make money in stocks is to follow the market trends and trade accordingly.