Mastering the basics of stock market investing

 

Do you want to learn how stock market investing works and how you can invest smartly to make it work for you? This guide has got you covered.

Anyone intending to invest in shares and become a part-owner of publicly traded companies must have a solid understanding of the stock market.

Stock market investing offers opportunities for significant financial growth but also poses risks due to its inherent volatility.

This guide is designed to simplify stock market investing and provide beginners with the knowledge necessary to make informed decisions.

The Stock Market: What is it? 

In essence, stock market investing is a market area where individuals and entities can purchase and sell company shares.

Upon acquiring a share, you become a shareholder of that firm and acquire a small portion of it. Say, if a company has issued 1,00,000 shares and you purchase 1000 of those shares, you own a 1% stake in the company. 

Shares indicate an entitlement to the company’s assets and earnings. As the company’s value changes, reflected in its stock price, shareholders can buy more shares or sell their existing shares on the stock market.

How well the business is doing and how investors view its prospects for the future both affect the price of these shares.

A network of stock exchanges facilitates the operation of the stock market. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the stock exchanges in India.

These exchanges provide the infrastructure for transactions between buyers and sellers, ensuring a fair and orderly market.

To protect investors and maintain trust in the financial system, the Securities and Exchange Board of India (SEBI) oversees the market in India.

How does the stock market work? 

The stock market operates as a complex network where individuals and institutions buy and sell shares, which represent ownership in companies.

This process is a fundamental aspect of the modern economy, enabling companies to raise capital for expansion and operations.

When a company decides it wants to raise funds, it can do so by issuing shares to the public in what is known as an initial public offering (IPO).

The company’s shares are being offered for sale to the general public on the share market for the first time. Shares that are listed can be bought and sold by investors on the stock market.

Each share’s price is based on the interaction between demand and supply. Put simply, a stock’s price increases when there is a greater desire to purchase it (supply) than there is to sell it (demand).

On the other hand, if a stock is more desired for sale than for purchase, its price decreases. Every day, there is a variation in stock prices which may be attributed to several factors such as market mood, company performance, and economic indicators.

The goal of stock purchases by investors is to profit. This can be achieved in two main ways: capital gains and dividends.

You realise a capital gain when you sell your stock for a higher price than you paid when you bought it. Conversely, dividends are a portion of a business’s profits that are given to shareholders, typically once a quarter.

It’s critical to remember that stock market investing carries risks. Stock values can fluctuate, so investors must be ready to lose money in addition to gains.

For instance, suppose you acquire 20 shares of a company at ₹10 each. If the company performs exceptionally well and the stock price rises to₹15, you could sell your shares for ₹300, earning a profit of ₹100. On the flip side, if the stock price falls to ₹7 due to various factors, your shares would be valued at ₹140, resulting in a loss if you decide to sell them.

How do you begin making your first stock market investing?

Step 1: Choose your investment type

The whole thing begins with a choice about investments. A variety of choices, including stocks, bonds, mutual funds, and derivatives, are available on the share market.

Stocks represent a share of ownership in a company, mutual funds pool money from many investors to invest in a diversified portfolio, bonds are loans to the government or corporations that pay back with interest, and derivatives are complex financial instruments based on the value of underlying assets.

Step 2: Open a demat account

To hold your shares electronically, you’ll need a Demat account before you can begin trading. Because they will be your point of access into the market, choosing a good broker is crucial. Before choosing, weigh costs, features, and platform usability.

Step 3: Research and study

Now that you have a Demat account, it’s time to research the market. This involves studying different stocks or investment options and understanding market trends. Use resources like financial newspapers, online articles, and stock market investing analysis provided by your broker to inform your choices.

Step 4: Set your investment goals

Before stock market investing, decide what your goals are. Are you looking for quick wins or steady growth over the long run?

What level of risk-taking are you willing to accept? Your goals will guide the types of investments you make and how you manage your portfolio.

Step 5: Start investing

With your goals in mind and research in hand, start investing in the stocks or securities that best fit your strategy. As you learn, don’t forget to start modestly, particularly if you’re new to investing, to minimise potential losses

Step 6: Monitor your portfolio

Stock market investing is not a task that should be done once and then forgotten. Keep a constant eye on the outcome of your investments. This aids in your comprehension of how well your decisions are working and whether your plan needs to be modified.

Basic strategies for stock market investing

Start with what you can afford to lose

Begin your investment journey with surplus income. This approach allows you to learn and develop investing skills with minimal risk.

Balance diversification and focus

Diversifying your investments can reduce risk, but too much diversification might dilute potential returns. Identify a balance that meets your goals for your investments.

Learn to analyse the market yourself

 Relying solely on expert advice can limit your learning. Develop your understanding of the market for more informed investing.

Avoid emotional decisions

Investment decisions should be based on thorough analysis rather than emotions or market sentiments.

Recognise important financial ratios

Learn about ratios such as the Price-to-earnings (P/E) ratio, Return on Equity (ROE), and Debt to Equity Ratio before making any stock market investing. These might aid in evaluating the financial stability and expansion prospects of an organisation.

Conclusion

Starting your stock market investing journey opens a world of financial opportunities and learning. The key is to approach investing with patience, research, and a strategic mindset,  ready to face its ups and downs while aiming for long-term growth and financial security.

DISCLAIMER: This article is not meant to be giving financial advice. Please seek a registered financial advisor for any investments.