Every person works hard to make his life better and earns money. They keep some part of their earning in saving so that future is secured.
But merely saving money won’t help you secure your future until the saved money is invested properly. Well, there are many options for investment, but the Share Market or Stock Market is a prime option for investment.
Many people want to invest in the Share Market, but due to lack of accurate knowledge about the stock market, either they do not invest in the Share Market or they lose their money. In view of this, we will be learning basics about the Stock market.
What is the Stock Market?
Stock Market is the place where Shares, Debentures, Mutual Funds, Derivatives, and other securities are purchased and sold. Shares are primarily bought and sold through the Stock Exchange and in India, BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are two main stock exchanges.
What is a Share?
Share means a unit of ownership that represents an equal proportion of the Company’s Capital. When you buy a company’s shares, you become the shareholder of the company. For example, if a company issues a total of 1 lakh shares and you have purchased 10 thousand shares from it, you become a 10% shareholder of that company. You can sell these shares in the stock market whenever you want.
How Does the Stock Market work?
First of all, companies bring the IPO (Initial Public Offering) by listing their shares in the stock exchanges and issue the shares through IPO at a specified price. Once an IPO is completed, the shares are assigned to the shareholders who bid for them. Subsequently, these shares come into the market and are bought and sold by investors through stock exchanges and brokers.
How Stock Price is set?
When Company issues an IPO, it sets the price of the share but once the IPO is completed, there is no role of the company in determining the value of the shares, and the value of shares is freely based on demand and supply of that company basis how that company evolves over a period of time.
If the number of shares sold in comparison to the Shares purchased is reduced, the prices of Shares will increase and if the number of shares purchased is less than the Shares sold, then the share price will decrease.
After being registered on the stock market, companies have to periodically share all the important information with the investors and on the basis of this information, investors value the companies. Depending on this evaluation, the decrease in the Demand and Supply of shares results in the price change of the shares in either direction.
What are SENSEX and NIFTY?
Sensex is the index of Bombay Stock Exchange and Sensex is determined based on the market capitalization of the top 30 companies listed in BSE. Sensex displays the performance of the top 30 companies of BSE. If the Sensex grows then this means that most companies registered with BSE have performed well and in the same way if the Sensex falls, it means that most of the companies are performing poorly.
Nifty is the index of the National Stock Exchange and it is determined on the basis of market capitalization (the total value of the companies) of the top 50 companies listed in the NSE. If Nifty grows, then this means that registered companies have performed well in the NSE and if Nifty decreases, it means that most of the companies have done badly.
What are the different types of Securities traded in Stock Market apart from Shares?
Bond / Debentures
Bond / Debenture is like a loan in a way. When a company requires money for a project, they can take a loan from the bank or they take loans from the public/investors and issue the Bonds / Debentures to the public, whose repayment they have to do in due time. Companies pay interest at a fixed rate on Bonds / Debentures on maturity just like a retail Investors pays interest to the bank when they take a loan.
Bonds / Debenture is a Secure Investment Option compared to Shares because the interest rate is fixed and repayment is done on Maturity (the term of the bond).
Mutual funds are indirect investments in one kind of shares and bonds. A mutual fund is a type of institution or trust that releases its units (like Shares), which people invest in. The Mutual Fund Manager invests all the money into various types of Shares and other securities based on their knowledge, experience, understanding, and analysis.
Investment in the Mutual Fund is beneficial to those who do not have much knowledge about the stock market or they do not have enough time to see the full information before investing in the stock, so they invest in mutual funds. Any dividend received by the Mutual Fund is distributed to the investors based on the units bought by them.
SIP – Systematic Investment Plan
SIP means – Systematic Investment Plan | SIP is a way to invest in mutual funds. Instead of investing a lump sum, every month a fixed amount is invested in a Mutual Fund. The investor’s bank account is linked to the SIP Scheme, which transfers a fixed amount from the bank account to the mutual fund every month and an equal amount of mutual fund units come to the investor’s account. Due to being simple and automatic, SIP is very popular nowadays.
Derivatives are an instrument to manage Financial risk. They are called a Derivative because their value is derived from an underlying asset. Trading in Derivatives is carried out through Options and Futures. In futures and Options, you can execute future transactions on a fixed price (Future Price) today. Normally, Actual Delivery is not provided in the Derivatives and Settlement is done on the basis of difference of value.
How to Buy Shares?
Keeping these rules in mind when you decide to invest in the Stock Market, the next step is to open a Trading and DEMAT account with a stockbroker.
What is a Demat Account?
When we open a bank account, all the money that we earn either through monthly salary or any other means gets transferred to the registered Bank account. Just like that all the securities like Share, Bonds, Government Securities, Mutual Funds, etc. are all stored in the electronic form in your Demat Account.
What is the Trading account?
Trading Account is used to Sell and Buy shares. You can open a Trading account with a broker. Nowadays, a lot of brokers have an online presence, Hence, you can either Buy or Sell shares online
How to Open Demat Account and Trading Account
To open Demat Account and Trading Account, you need to get KYC done from whichever broker you want to open Demat account with. The documents you will need to open Demat and Trading Account are as follows:
Pan Card: You need to provide PAN Card to get yourself authenticated and Identified
Photo: You should have a photo of your latest passport size.
Address Proof: You can use the Aadhaar card to validate your residence location.
Canceled Check: You must have a canceled check written in your name. If you do not have this, do not worry, the bank statement of the last six months can also solve your problem.
Keep in mind that while submitting these documents, your name is written correctly and clearly. When you open a Demat Account or a Trading Account, you must read carefully the rules and instructions so that there won’t be any last minute surprise regarding brokerage cost and
Golden Tips for Investment in the Stock Market:
Making money by investing in direct equity in the stock market is not so easy as any new investor thinks. You have to keep a close eye on the market every single day and have to take a lot of factors into considerations.
One great about Investing in stock Market is that you can make money even if the market and underlined stocks are falling if you sell the falling stock instead of buying it.
All these tips will help you to overcome some of your difficulties and shortcomings while investing in the share market.
Keep these things in mind while buying and selling shares
First Learn and then Earn
One Should never jump in the stock market without knowing anything at all. First, understand the stock market in its entirety. You have to meticulously study all the factors that affect the price movement of stocks in either direction.
Give yourself time to learn, read business-related news, understand business plans of companies, learn to read a balance sheet, know P / E, EPS, ROE and then invest in any Stock Market.
Long Term Investment Best
You should invest in the stock market for a long time. If you select a Company with good business and fundamentals you are guaranteed to make multiplied returns out of your investment. If you understand what factors affect the price of a stock in the short term or daily basis then you can try your hands at intra-day trading, but there is a huge risk as your entire capital may get wiped out in minutes.
Invest in Stocks which you know and understand
In the stock market, you can buy shares of any company, but you should initially buy the share of the company that you know, an i.e. company which sells Household items or any industry that you are familiar with.
For example, the company making Maggi, oil, biscuit, etc. It will be easy for you to understand how the Company makes money and you can offset the risk that may be associated with Unknown Industry and subsequently Company.
Set fixed price
Always decide the Capital that you are going to put into Stock Marker. Never get too excited by the profit you are making and always be clear about how much money you want to invest. If you bought a stock for 1000 thousand rupees and then set a Stop loss and target as per your risk appetite.
Do not Buy Many Stocks Together
As a beginner, do not put money into a lot of companies at the same time. It makes very difficult to whereabouts of multiple companies at once. In the process, you get confused and end up doing things that you are not supposed to do.
Choose a Fundamentally good company
You should buy Equity (shares) of a company that is financially strong. Because a company which is financially struggling to make ends meet is going to go only way i.e. down
Companies involved in the Nifty and Sensex are very good companies in their sector, you can feel to invest in those shares.
Create a Risk Profile for Portfolio
Investing in the Stock Market is a risk. You can become broke overnight if you get don’t manage risk very well. Don’t get ahead of yourself and invest more money.
Research and Planning
Research and deep planning is a must before investing in the Stock Market. Keep an eye on the market all the time, look at the past records of the company you want to buy, look at its management, look at any political and social changes that may happen in the future. Keep looking at the recession and how the recession impacts the business of the company.
P / E Ratio (Price / Earnings Ratio) –
P / E ratio i.e. how much your earnings will be per share of the company. The most attention needs to be paid on this. To know the P / E ratio you must first calculate EPS (Earning per Share). This is calculated by dividing net profit by a number of shares.
Let’s say a company whose name is ABC issues 1000 shares and its net profit is 1 lakh, so in this way earning on one share would mean EPS 100.
To calculate P / E, divide the Market Price by EPS. For example, if the market price of a company ABC is 500 rupees and EPS is 100 rupees then its P / E ratio would be 5 rupees.
Do not let your Emotion dominate
Always keep away from greed and fear. Do not let your hunches take precedence when it comes to investment. Always, think practically before putting money into the Stock Market.
11. Do not blindly listen to Expert on News Channels:
Always back up stock tips provided by Experts with your own research. Think about the Stock market as an individual sport and you have to do holistic research by yourself to earn decent money over time.
I hope all this Information and tips about the stock Market will help you kick-start your investment in the Stock Market