6 steps to reaping high returns from stock markets

Written by Adhil Shetty | AdhilShetty | Updated: Dec 13 2013, 21:35pm hrs
Stock MarketInvesting in stock markets is not about hard work, but about understanding tricks of trading business.
The best way to make money in the stock market is to have a long-term strategy and a disciplined approach. Investing in stock markets is not about hard work, but about understanding the tricks of the trading business.

Stay informed

There is always an element of risk while investing in the stock market, but staying well informed of the day-to-day economic scenario can help one make informed choices. A good return on investment is the key when it comes to successfully handling the stock market. Taking informed decisions is a major contributor in enhancing the return on investment. To do so, one must understand the overall economic scenario, and the fundamental and technical nuances of the company's one has invested in. Keeping track of various sectors is also part of the overall strategy. One of the big mistakes a lot of investors make is to buy stocks of companies without having any knowledge of their business model.

Be an investor, not a speculator

Over the long term, one must act and believe as an investor. Investing in stock markets is akin to a marriage, which can have its ups and downs, but, over a period of time, brings financial stability and good returns.

Not every stock in your portfolio will give you positive returns, but compared to short term, most stocks can give you ample appreciation over the long term. The best bet is to have an investment portfolio with 5-10 years lock-in and beyond. A reason why a lot of people burn their fingers in the stock market is that they speculate, trying to get rich overnight rather than invest in a company for the long term.

Focus on fundamentals

Irrespective of the duration of your investment, a golden rule to avoid losses is to take a hard look at the fundamentals of the company before buying its stock. Stock markets generally move in advance of news or supportive fundamentals. Tracing the undercurrent of a trend can make the difference between profit and loss.

Fundamental analysis must act as the walking stick in rough times to counter any negative market sentiment. Remember, day-trading or short-term stock investing is only for a limited set of people. While the gains can be substantial, the losses can be even more phenomenal. Investing in the long term in fundamentally strong companies is the best and the safest way to earn money from the stock market.

Stay away from penny stocks

Staying away from bargain stocks ensures that your earnings are not lost in hopes of a high-percentage gain. One of the big mistakes retail investors make is to pick stocks depending on their price rather than the company business plan and fundamentals. Returns on any investment in the stock market are related to the fundamental growth of the company. A large number of bargain stocks are sluggish and have virtually no upside trend due to lack of strong market fundamentals. One has a higher chance of making money by investing in the stock of one fundamentally strong company (like a mid-cap or a large-cap) than by investing in several penny stocks of a small-cap company.

Diversify your portfolio

Even if you are a long-term investor, you must have a diversified portfolio. Investing in multiple sectors and various companies of different sizes across the board makes sure that one can fight the sluggishness in one sector.

Average out losses

Learning to limit losses is one of the best ways to avoid bleeding in the stock market. A large number of investors sell for marginal profits, but hold on to their stocks even with the stock going way beyond the purchase price. The best way to make money in such a scenario is to first limit losses by buying on dips or buying when the stock is falling to bring down the average purchase price. Buy low, sell high is the fundamental rule of the game. Trying to limit the losses and maximising the gains is the art that only a long-term investor can master.

The writer is CEO, BankBazaar.com