Last Updated on 28/07/2020 by Deepak Singla
What comes to your mind when you read the words “stock market”?
If you’ve never stepped foot in the investing sphere, you might believe that a stock market is a place of fear and greed and eventual losses.
However, if you look beyond all that and brush yourself up on the basics of how exactly the market works, you’ll see that beyond the fear and greed, there is long-term growth and an opportunity to build a financially secure future.
To seize this opportunity, we will have to dive deep into the basics, and that is what we will be doing in this article.
What is the stock market?
A market is a place of exchange where buyers and sellers interact, and the word “stock” represents a piece of the ownership of a company.
Therefore, a stock market is a place where potential investors can trade or invest in the stocks of public companies.
Why invest in the Stock Market?
If we want to save and grow our money, we can put it in fixed deposits or savings accounts, which pay us interest on our funds.
If that’s the case, then why should we invest in the stock market?
A unique feature of stocks that separates them from other investment avenues is that the value of a stock relies on the performance of its company.
If the company does well, the value of the stock rises, and the investor makes profits.
If we choose a basket of companies (called a portfolio) and invest in them after checking out their business prospects, we will be able to grow our wealth through the growth of all these companies.
Therefore, it is clear that how the stock market works and provide us with more returns than a simple fixed deposit.
Learn stock market Basics
Before we start doing something new, it is natural that we build a sound base of knowledge about it.
Therefore, before we get into the process of investing, we must talk about the knowledge required to do so.
n today’s time, many educational resources can help us out with this. Some of these include –
- Books – Some of the greatest investors of our time, like Warren Buffett and Benjamin Graham, have written books about how they created wealth in the markets. These books are a great source of inspiration for potential investors.
- Courses – With the advancements in e-learning, many websites provide stock market courses to assist beginners. Examples include Udemy, Coursera, and Elearnmarkets
- Virtual Trading – After gaining the necessary knowledge, it will be best if we can test it somehow. Virtual trading sites like Investopedia’s Stock Simulator and Moneybhai by Moneycontrol help learners test their skills.
How to start invest in the stock market?
If we look back in history, there was a time when the companies’ stocks were sold in a physical format. Those days are long gone.
If we want to begin investing in the stock market now, there is a plan of action we have to follow.
The steps of this plan include –
- Opening a Trading and Demat account;
- Fulfilling the required KYC requirements;
- Finding an appropriate broker; and
- Placing orders to buy stocks through the broker.
The first three steps are quite easy, and they have been made easier with the efforts made by banks and regulatory authorities to promote investments.
It is the fourth step where most beginners face problems. Why? It’s because of the endless options that investors have.
Let’s discuss some of these in detail.
Types of investment products available in the stock market
In today’s scenario, there are various types of products with unique features that cater to different types of investors.
Some of the popular products include –
- Shares – As we’ve already discussed, stocks or shares represent ownership in a company. The segment for the market for shares is known as the equity segment.
- Debt instruments – A debt instrument provides investors with fixed income, and because of this, they are also known as fixed-income securities. They are issued by a company, but they don’t represent ownership in a company.
- Mutual funds – A mutual fund is a basket of securities that is managed by a professional fund manager. A mutual fund is of several types, depending upon different criteria.
- Derivatives – This class of products is relatively new in the market. In simple words, a derivative is a product, the value of which depends on an underlying security. Examples include options and futures.
It’s great that we have so many choices, but the question still stands – which products do we choose, and on what basis?
Building a Portfolio
With so many choices available to us, investing in just one type of product seems quite bland.
Why not create an entire set of your favorite products, based on the amount of risk you’re willing to take in the market?
This set is known as a portfolio. It depends on two factors –
- Risk – A crucial element of investing is the risk we are willing to undertake. Based on it, there are different classes of products we can fit into our portfolio.
- Time horizon – Are you looking to create long-term wealth, or are you trying to fulfill a short-term obligation with your investments? Based on this, your portfolio will hold different products as well.
An important thing to remember here is to make sure you’re diversifying well.
Diversification refers to choosing different types of investments to minimize the risk of your portfolio as much as possible.
The field of investing in the stock market is a broad one. This article is a small step in helping you grasp its basics.
As a beginner, there will be a lot to learn, but with the right combination of dedication, patience, and willpower, you’ll be investing successfully in no time.