I am here to transform you from a complete novice to a super star trader and investor.I have written this article ” How To Start Investing In The Stock Market “, in order to start your investing career. I am not joking here (Ha!). In less than a hour, you are going to learn all the chops available to survive in this world of investing. What! you don’t believe it too?
Ok ok. Listen! In this post, I am going to walk you through the steps you need to set up your account and start trading. I mean, buy and sell shares on your computer. Also, I am going to explain to you the concepts that i have learned over the period of time to pick a good stock and also some of the terms related to stock market. And it is not like count to ten and choose.But, some small topics that i learnt and found to be somewhat helpful in choosing a stock.
Did you make that coffee? What! I told you, it is a bit of a long read. I didn’t tell you? Ok, get a coffee. It’s a somewhat long read. (Happy now ?)
So, you are new to the world of investing and trading stock.But, why do you want to trade in stocks? Because your uncle became rich by trading in stocks and you want to earn money too! Then that holiday in Paris and those parties you can afford. Right? OK, lets dive in.
If ever you wanted to start a business, but didn’t get a chance to start that.Whatever the reason may be.May be you didn’t want that business in your life or the hard work it comes naturally with the business. Or that all the management aspect of it. May be marketing was not your cup of tea.Don’t get hopeless. You are in luck now. You can buy a stock and own a part of a business.
What is a stock or a share (what does it represent):
A share is a part of a business.You buy a share and you become an investor in that business equivalent to the part of share you buy. It represents a part in the business.So to sum it all, stocks or shares are a small divisions of ownership in any company or corporation. Any company can issue shares to its owners and owners get part of profit based on the amount of stocks or shares they hold.
Shares are of two types. Preferred shares and Common shares. In case of filing for insolvency , preferred shares get preference over common shares. Common share holders have right to vote in company meetings whereas preferred share holders don’t. Common shares have features like appreciation which is absent in preferred shares. Shares have been dematerialized in most of the countries. They are stored in electronic form in a demat account.
What is a stock market:
A place where shares are traded at a market determined price is known as a Stock Market.You might have heard of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Both of them are very famous stock exchanges in India. Like them, there are many other exchanges in India. These two are most important and famous. BSE is Asia’s first stock exchange and was started in 1875. It is in Mumbai.
In the Stock Market, there are traders available. These traders trade as per the order of their customers. In order to participate in trading, we need to register ourselves with any one of the available stock brokerage companies present.These companies work as per the strict guidelines of Securities and Exchange Board of India (SEBI), the regulatory agency created by the Government of India, to oversee the workings of stock market . Now a days, you can avail the features of online trading, where you yourself can trade on the software platform provided by the stock brokerage company , you registered with.
Securities and Exchange Board Of India was established on 12th of April 1992 in accordance with the provisions of Securities and Exchange Board Of India Act, 1992. Its primary function is to regulate the market as per the rules established by law, develop the more efficient market,bring more transparency and detect any malpractice in the industry along with the safeguarding of the interests of investors in securities.
Primary Capital Market and Secondary Capital Market:
In primary market, individuals and companies buy shares directly from companies. It is generally through Initial Public Offerings or IPOs.A very large portion of these securities or shares are generally sold to big investors and companies probably due to small time frame in which these IPOs have to sell huge volume of securities.
In the secondary market, the securities purchased in IPOs and other previously available securities are traded at the market determined prices.Any individual or company can participate in it as per the rules established by SEBI. You might have seen major talks about sale , hold and/or purchase of securities in news and other investment shows. All these are talking about secondary market.
Why Stock Investing Is A Good Choice (dividend + appreciation):
Now hold on for a minute.Tell me one thing.With all these investment options available, why choose stock market? Why not prefer a safer instrument like a bank deposit or fixed deposit? A bank deposit is safe and reliable. Or, why not keep in your personal locker in your home? Who else is going to take care of your money other than you yourself?
Over time, the fixed rate of return from deposit and the zero return from your locker will not give enough return to beat the inflation. Inflation keeps increasing every year. If you don’t earn more than the rate of inflation,there is a loss in your portfolio.Everything becomes costly and your money is not earning enough. Here, stock market comes into play. If you invest wisely, your return from appreciation of stocks and dividend over the long period of time, will give you a great weapon to fight inflation.
Why it is not realistic to think of exponential gains from stock market (IPO participants become that):
Isn’t is that you came into stock market to become filthy rich? Then we all should aspire to have exponential gains from stock market. Well, for that we have to study, invest and wait patiently to gain the appreciation in stock. It will take a long time. I will explain now.
When someone starts a company, invests his money and time to make it great and profitable. He is getting cash flow out of it and it continues for a greater part of business until a day, when there is requirement of fund to expand.Then comes investors. They invest money. Then, after some times, everyone wants their money back along with profit.They decide to go for an IPO. After the IPO, money received is distributed in form of securities held as part of their business. Here, the growth was exponential. Security got listed at a valued price. Everyone, who was holding the part of the business at that time, got rich.
After the IPO, retail and institutional investors get in. But, we don’t have the option of an IPO at this stage. So, there is no great valuation and get rich scheme available with us. We have to watch the performance of the company and adjust according to the market performance. Here also, many companies give great returns and dividend in the long run. But, not equal to IPO equivalent wealth. So, we need to have realistic expectations and proceed carefully.
How You Can Participate (secondary market):
In order to buy and sell securities or shares, we need a Savings account with your bank. Then we need a stock brokerage company , who will provide us with a trading and demat account.All the three accounts are linked and then the stock brokerage company provides id and password. Now , we are all set for our stock market journey.A savings account is where our money is. A trading account is where we trade (buy and sell) stocks and a demat account is for keeping our shares in dematerialized form.
There are several charges associated with stock trading. Demat account charges, Annual charges and buy and sell charges.Then there is Securities Transaction Tax and GST. Many stock brokerage companies provide a flat charges for trading.As a beginner, i would recommend you to go for a discount broker like ZERODHA. They are great and most of the charges here are either zero or flat.I also use it for trading.
Buying A Share:
Buying a share implies that you are investing in a part of business equivalent to the portion of that share. Naturally, if you are a sane person, you would like to know if the performance of the company is satisfactory or not.Otherwise, it would not be a good idea to buy a bad performing company. After all, you are handing over your hard earned money for it.So, how do you analyse the performance of the company? By doing analysis of its balance sheet, income, previous performance, price chart, trend etc.
Two types of trading practices are widely used. One is speculating and other is investing.Many a times , a difference between the two has been tried and explained. But over time, the difference has become very negligible.
Once, the great investor Mr Benjamin Graham differentiated the two as:
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative. – Benjamin Graham ”
And then Mr Warren Buffett explained it as :
“An investment operation is “one where you look to the asset itself to determine your decision to lay out some money now, to get some more money back later on”. Speculation is an action more focused on the price action of the stock, but not the stock itself.” Investing Analysis and Style:
Analysis is typically of two types. Technical and Fundamental. Technical analysis is focused on reading and following historic charts and past performance. Whereas, fundamental analysis is based on company fundamentals, balance sheet, board composition and vision of the management and its action among others.
Style of investors is generally seen as day traders or long time investors. Day traders are generally who try to speculate over the price difference and generating profit over short period of time. Long term investors generally enter in the market to get capital appreciation and dividend payout. Long term investors are generally people who invest based on the company fundamentals and long term prospects of profit.
So, to conclude till this line, we have learnt about stocks and stock market including BSE and NSE. Then we inquired about Securities and Exchange Board Of India. After that came capital market , wherein primary and secondary market are discussed. Then , we came along the question of ” Why we should invest in the stock market?”. After that we burst the myth about ” why it is not good to expect an exponential return on investment?”. Then, we came across how to participate in stock market. And then, ” what does it mean when you buy a stock? “. Then came the trading style and investment analysis while investing in stock market.
Now, in the part two of this article ( Investing! Tools Of The Trade), we will discuss about other topics related to investing and analysis and some other topics.
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