Direct and Indirect Investment methods in stock market
There are several methods for investing in the stock market. You can trade by yourself on the stock market but it is quite risky and speculative as you don’t know how to professionally trade in the stock market, it is recommended to go for professional stock market training. Even after getting training a trader has to improvise consistently; it takes time, motivation and above all a lot of hard work to become perfect in the research and start making profitable trades from the stock market.
Before investing in the stock market, you must also determine your risk profile. If you want to succeed in making money from the stock market, it is very important to know your risk appetite. Some are interested in taking more risks and in return they will get more rewards and others would like to minimize the risks to protect their capital.
The objective of this article is to present to you the different means you have to build a stock market portfolio as part of an investment. So, Lets discuss about what are the different methods of investment in the stock market which can be classified as direct and indirect methods of investment in the stock market.
Direct Investment method in the stock market
To invest in the stock market, you can open a securities account with your bank or an online broker specializing in the stock market. Investing in the stock market directly involves significant risks. Before making investment in the stock market directly or trading it by yourself, one should be very clear about different concepts of stock market and also have practical knowledge of technical analysis, fundamental analysis, options and derivatives call and puts, portfolio management, arbitraging etc. Another important thing that you should learn in the stock market is the timing of trade i.e when to buy and when to sell. This is something which is even the well-versed technical analyst would not be able to analyze properly. Taking a position at the right time is generating better profitability on your investments in the stock market and you will be able to learn it after rigorous research in the stock market. To get an idea about the timings of the trade one can use different charts, patterns, candlesticks, technical analysis tools etc.
Indirect Investment in the stock market
If you do not feel able to build up a stock market portfolio, you can invest in the stock market via investment funds or mutual funds. These mutual funds can in most cases be incorporated into a life insurance contract. There are then three ways to invest in the stock market:
Free management: This type of management allows you to choose yourself the investment funds in which you wish to invest. You decide entirely on the allocation of your assets between these different mutual funds. You have the option of making changes for the duration of your investment.
Mandate management: You allocate your money to a manager who is in charge of the allocation of your assets. It is he who decides which funds to invest in. Your opinion does not fit into the choice of funds. The manager has full powers over your account and can carry out arbitrations if he wishes.
Managed management: You allocate your money to a manager but by giving him instructions. For example, you can tell him that any profits are only reinvested in equities, or ask for a gradual increase in risk each year. All fantasies are possible as long as the manager agrees to the signing of the contract.
Your risk profile
Before making investment in the stock market, you must determine your risk profile. Whether you are investing directly or indirectly, you must analyze your risk factors with a help of a professional trader who would help you to know the different risk factors before making investment in the stock market. There are 3 main risk profiles:
Prudent investors: This category includes investors with a high risk aversion. They are not very much care loses their money and are not looking for better performance and profits. Their objective is just to make their capital work while ensuring a high profitability of their stock market portfolio.
With a direct stock market investment method, you must then favor defensive stocks, large caps and yield stocks.
With an indirect stock market investment method, the allocation of your assets will be oriented towards money market and bond funds. Equity funds will be lightly weighted so as not to expose your portfolio to risk.
Balanced investors: This category includes investors with a moderate risk aversion. They are willing to take a few risks to get some performance. It is the category of investors that will have the greatest diversification of their stock market portfolio.
With a direct stock market investment method, there will be total diversification between defensive / cyclical stocks, Large Caps / Small Caps, growth stocks / yield stocks.
With an indirect stock market investment method, the distribution will be equitable between equity, bond and money market funds.
Dynamic investors: This category includes investors with a low risk aversion. They are above all in search of performance and are ready to take risks to achieve their objectives.
With a direct stock market investment method, you should therefore favor cyclical stocks, small caps and growth stocks.
With an indirect stock market investment method, the allocation of your assets will be oriented towards equity funds which will allow you to seek performance and boost the profitability of your stock market portfolio.