Shares or Stock markets as told by our uncles and neighbours are risky, are gamble and people have lost their entire wealth by investing in stock markets. But out there are also people like Warren Buffett, Carlos Slim Helu, Rakesh Jhunjhunwala etc. who have made their fortunes by investing in share markets.
So the first question that comes to mind is that why some people lose all their fortunes in stock markets & some people become billionaires by investing in stocks of companies. So the difference lies in the majority don’t know what is the stock market and how it works & those who know what is stock market don’t know how to practically make money from stock markets. So let us understand in detail how to make money from stock markets.
In Reality, there are 3 Ways to make money from the Stock Markets namely Dividend Income, Capital Appreciation, Intraday Trading of Shares. Let us understand all three of them in detail and find out which is the best for you.
1) Dividend Income
This is the easiest way to earn passive income from investing in shares. You buy shares of a certain company hold it in your portfolio and whenever the company declares a dividend, you get money directly into your bank account.
It is not compulsory to declare dividends, as dividends are paid out of profits. Companies who are not profitable cannot pay a dividend.
A dividend is nothing but a share of a company’s profit to its investors. The dividend is paid in cash and declared by the board of directors of the company. The Dividend may be paid quarterly, semi-annually or annually as the company’s wish.
Advantages of Dividend Income
1) Easy to earn passive income on your investment.
2) The Dividend of good companies increases over a period, which increases your dividend yield.
3) Dividend received up to Rs.10 Lakhs are Tax-free in the hands of the investor.
Disadvantages of Dividend Income
1) Dividends are tax-free in the hands of the investor, but companies before paying dividends have to pay DDT (Dividend Distribution Tax) at present DDT of 17.65% (15% Tax + 12% Surcharge + 4%Cess) has to be paid out of the dividend declared.
2) Dividends Received from mutual funds are taxed at 10% if it crosses Rs.10 Lakhs in a financial year. So If you earn more than Rs.10 Lakhs dividend in a year, your dividend income will double-taxed by DDT & your personal income tax as well.
3) Dividend Yields are very low in some stocks which means you have to invest a lot to earn the same dividend income.
Who Should Select Dividend Income Option
Dividend Income is a good way to earn passive income but investors should not invest in stocks just to earn dividend income. Investors should treat dividends as a passive source of income and try to invest in good stocks (Even if they don’t pay a dividend)
2) Intraday Trading Income
Another way to earn money from stock markets is to trade stocks, this is similar to any trading business out there you see in real life. You buy stocks at a lower price and sell at a higher price and difference is your profit.
In this method, you make a profit when share prices go up and you incur a loss when share prices go down.
You can do intraday trade where you can buy & sell shares on the same day or you can do BTST ( Buy Today Sell Tomorrow) where you buy shares today and sell on the next day.
Advantages of Intraday Trading
1) This is easy to execute can be done online sitting at home, office or anywhere you want.
2) Less Capital is required for day trading, Once you buy and sell shares your capital is free for another trade you can execute multiple trades with the same money.
Disadvantages of Intraday Trading
1) Intraday Trading can be really risky as you have to predict the share price you can go really wrong and lose all your capital
2) Some Brokers also provide margin where you can buy more than you can.20X Margin means you can buy shares worth Rs.20 even if you have only Rs.1 in your funds. Using margin can destroy more capital then you have as losses multiply when you are trading on margin money.
3) Trading requires you to have a knowledge of technical analysis, chart reading and other such various methods.
4) There is no guarantee of making money in Intraday Trading
Who Should Select Intraday Trading
Intraday Trade is very difficult to execute and we advise people to stay away from it. But people who have sufficient time to trade and do an analysis of the market should definitely do intraday trade. Traders who earn money from trading income should not depend on only trading income and should develop other forms of income.
3) Capital Appreciation / Growth /Investment Method
Capital Appreciation / Growth Method is a method where you buy shares and hold it for the long term and you make money when share prices go up.
Advantages of Growth Option
1) You can Create Wealth in Growth Option over a long period of time, where you invest and all the gains are reinvested in the scheme and compounding effect takes its place.
2) No Taxes on Bookish gains, If you invest at Rs.40 and share price rises to Rs.45 there is no tax to be paid until you actually sell the units.
3) Tax is to be paid only when the actual sale of shares is done. For Shares held for less than 1 Year tax is to be paid at 15% of Gain & for shares held for more than 1 Year are taxed at 10% on Capital Gain (No Tax Upto Rs.1,00,000 Gain)
Disadvantages of Growth Option
1) Investing Option requires a lot of patience from the Investor’s side and Wealth is only created in the long term.
2) You need to ignore all market volatility, market noises and hold on your investments for a long period of time.
Who Should Select Growth Option of Investing
Investors who are looking for Capital Appreciation over the long term should select Growth Option. You can link you various goals such as retirement, child education and vacation to each investment and sell investment once the goal is achieved.
We Also Recommend to all investors to invest in quality stocks and hold your investments for a longer period of time. Many renowned investors made their fortunes by holding their equity investments for a period of time such. Market Experts like Warren Buffett also advise people to invest for the long term and create wealth for themselves.
If you want to make money in the stock markets you first need a Demat Account with SEBI Registered Broker. At Prate Markets we personally use Upstox, Upstox is a low-cost Discount Broking firm providing Trading & other Investment Related Services at an unbelievable price. Upstox has its Upstox Pro Web & Upstox Pro Mobile Platforms which offer Trading, Analysis, Charting and many more features on its App & Website.
Also Read – How to Invest in the Stock Market in India?
Hope you are able to understand how to make money from stock markets in various ways, invest in ways which suit your investment approach and risk appetite. If you have any questions do let us know in the comments section below and Thank You very much for reading this article.