How to start investing in stock market ? A beginner's Guide
Investing in stocks means buying shares of ownership in a public company. Those small shares are known as the company’s stock, and by investing in that stock, you’re hoping the company grows and performs well over time. When that happens, your shares may become more valuable, and other investors may be willing to buy them from you for more than you paid for them. That means you could earn a profit if you decide to sell them.
Investing in the stock market is a long game. A good rule of thumb is to have a diversified investment portfolio and stay invested, even when the market has ups and downs. One of the best ways for beginners to learn how to invest in stocks is to put money in an online investment account, which can then be used to invest in shares of stock or stock mutual funds.
The stock market has been a valuable choice for investing for more than 100 years, with older versions of equity investing existing as far back as the 1600s. But today, many people falsely believe that stock investing is only for people who already have significant capital. The stereotype of a stock investor is someone in their 40s or older, with millions of dollars already in the bank.
In reality, stock investing can be valuable for almost anyone who wants to pursue it and you can get started even if you have a limited amount of capital.
Types of investments in Stock Market
There are various types of investments to be carried out in the stock market, Stocks Bonds, Mutual Fund, Derivatives, Currencies, Future & Options, Commodities
One of the popular investment products in stock market is IPOs. IPOs (Initial Public Offerings) are the first sale of shares by a privately owned company to the public and are a good option for starting an investment. When a company sell its shares in primary stock market for the first time it is called as Initial Public Offerings. After completion of the process and allotment of shares the company gets listed and can start selling its shares in secondary market.
Stock Market Investment Process
- A. Select an intermediary
You need to select an authorized bank or the financial institution or broker, which you want to open an account with.
- B. Documentation
Submission of photocopy of required details like PAN, AADHAR, photograph and other relevant documentation.
- C. Verification
Upon successful verification of the documents submitted, the Demat account is opened. You receive a unique Client ID from the intermediary you selected. This will help you to get access to your Demat Account online.
Now, enjoy doing a thorough research of your preferred segment of business and start investing into them.
Barriers to entry
The question is, how do you enter this market? There are two main barriers to entry: money to buy stocks and knowledge on how to invest wisely.
When it comes to money, there are three factors to consider:
- Minimum account requirements: Some financial institutions mandate you to have a minimum account value before opening an account to trade stocks. However, some apps allow you to trade with no minimum balance whatsoever, and some minimums are easier thresholds to meet (like a $500 minimum balance).
- Trading fees: Historically, investors would need to pay a small commission fee every time they issued a trade; they might pay $8 every time they bought or sold an asset. However, in the modern era, free commissions are more common. In other words, you could pay nothing in trading fees.
- Individual stock prices: The only variable that remains is the price of individual stocks. Depending on the company, a share could be less than $1 or it could be several thousand dollars. Most are a few dozen to a few hundred dollars per share.
Accordingly, this barrier to entry has become relatively low. You can begin investing with as little as $10 under the right conditions, though you should try to collect at least a few hundred so you have more options, in my opinion. For many investors, $500 is a good starting point.
The other barrier to entry is knowledge. How does the stock market work? What makes a good investment? Should you diversify or put all your eggs in a few well-researched baskets? The only way to get over this barrier is to study and increase your knowledge and experience.
Benefits of Investing in Stocks
Despite its skyrocketing popularity and presence in the news, investing in stocks can seem like a rather formidable activity. The risk incorporated in the idea of stock market investing can deter people from diversifying their portfolios beyond fixed deposits, gold and mutual funds. However, by effectively managing your risk tolerance, investing in stocks can be vital in maximizing your investments.
As the legendary investor Peter Lynch once said, "The real key to making money in stocks is not to get scared out of them."
- 1.Dividend Income
Dividends distributed by the company are a part of their profits that are a source of income for many shareholders. Typically, dividends are paid every quarter, but not all companies pay dividends. They may decide to reinvest this profit back into the company. Dividends are a way for companies to distribute a portion of their profits to shareholders, even if the stock has fallen in value.
Dividends received from the ownership of stocks can offer investors several benefits. Dividend payments can increase the total return on your investment in the stock. They also help lower volatility in the stock prices by helping support the stock price.
Consistent and growing dividend payments are generally an indicator of business stability and a growth in earnings. It is common for people to fund their retirement or augment their portfolio values through these dividend payouts.
- 2.Diversification Benefits & Liquidity
The stock market offers different financial instruments, such as shares, bonds, mutual funds, and derivatives, that offer investors a wide range of securities to invest in, as per their risk appetite and financial goals.
Investment in varied stocks also offers great diversification as it reduces your portfolio concentration. This flexibility is beneficial in mitigating the risks inherent to stock investing by enabling diversification of investment portfolios and offsetting market risks. A well-diversified portfolio helps build your wealth by leveraging growth in different sectors of the economy, resulting in a profit even if some individual stocks lose value.
Another benefit of investing in stocks is that they are highly liquid assets. They allow you to buy or sell stocks immediately without having to forage for buyers or sellers for your securities. The same cannot be said for other assets like real estate or long term debt instruments. Economists use the term "liquid" to mean that you can turn your shares into cash quickly and with low transaction costs.
- 3.Investment Gains
One of the major benefits of investing in the stock market is that investors get the chance to earn more money. Over time, if the stock market rises in value, the prices of a particular stock can rise or fall.
However, investors who have put their money in stable companies will see profit growth. Likewise, investing in several different stocks will help investors build their wealth by leveraging growth in multiple sectors resulting in a profit.
- 4.Smooth and Continuous Transactions
An investor who buys a particular company's stock essentially means getting an ownership stake in that specific company. Thus, it will give the investors a feeling of ownership after purchasing stocks.
Having ownership means that they will become shareholders and play a vital role in a company's decision. Investors will also have the power to vote in decisions taken by the company.
They also receive annual learn reports to get detailed insights and learn more about the company. Owning a particular company's stock will be a way to express their loyalty towards a company and the business's success as a whole.
- 5.It Allows You To Take Advantage Of The Growing Economy
Corporate earnings usually tend to increase as there is growth in an economy. This is usually due to several factors like increased job creation, leading to an increase in income and sales.
Thus, an investor putting its money in stocks of the businesses influenced by economic growth helps them grow better.
- 6.Versatility
The stock market offers different financial instruments, such as shares, bonds, mutual funds, and derivatives. This provides investors a wide choice of products in which to invest their monies. In addition to providing investment choices, this flexibility is beneficial in mitigating the risks inherent to stock investing by enabling diversification of investment portfolios.
- 7.Acquire Ownership and Right to Vote:
Even if an investor acquires a single share in a company, he acquires a portion of ownership in the company. This ownership, in turn, provides investors the right to vote and offer his contribution in the strategic movement of the business. Although this may seem like an exaggeration, it is true and there are several instances when shareholders have prevented company management from making unreasonable decisions that are detrimental to their interests.
Risks of investing in stock market
"Stock market investments are subject to market risk. Please read scheme-related documents carefully before investing." Surely many of us must have heard this disclaimer when watching stock market advertisements, right? But seldom are we able to understand it.
Are you aware of the risks surrounding the stock market? Is market risk the only risk? What are the other types of risks a stock market investor faces?
- 1. Market risk
Whenever you buy or sell a stock, what determines the profit or loss? Quite naturally, it's the stock’s price, isn't it? The price at which you buy the stock and the price at which you sell it, determine the investor’s profit and loss from that investment. And given that stock prices keep fluctuating every day and within the day too, it's this market risk that every stock market investor should be aware of.
These ups and downs in stock price are driven by not one but multiple factors, but ultimately due to the supply and demand at that point of time in the market. Other factors that impact the stock price and the demand-supply, include the company’s EPS (earning per share), P/E ratio (price-earnings ratio), short term trends, liquidity, impact of news, investor demographics etc.
So, overall, the risk of incurring losses in the stock market is what is referred to as market risk. Market risk ultimately exists because of the stock price changes/fluctuations.
- 2. Company Risk
We all know that a share is a piece of ownership you get in the company, as a stock investor. So, ups and downs in a company’s performance affect its stock price too. Simply put, if the company is performing well, its stock price can witness a rise. Whereas on the other hand, losses or problems in business, or downfall in revenue, then the stock price can fall.
That is why it's always advisable for investors to analyze the financial strength, management, etc of the company before investing in a company’s stock.
- 3. Liquidity risk
Besides gaining profits from the sale of stock, dividends are another source of income in stocks. It is mostly preferred by those preferring regular income from their stock investments. And to declare dividends, the solvency or liquidity of the company is crucial. A company with liquidity problems can cut back on dividends or at worse, find it difficult to even clear its bills or repay its debts. All this can have an adverse effect on the stock price of the company.
- 4. Inflation risk
Last but not the least, is the inflation risk. Simply put, inflation is an overall increase in the price of commodities and products in an economy. When the inflation rate rises, companies have to spend more to procure the same amount of raw material. And such a rise in inflation reduces the purchasing power of the company, which can impact the profitability of the company and cause a drop in share prices as well.
While these are amongst the primary risks impacting the stock market investor and the stock prices, there are various other risks as well, like political risk, social risk, currency risk, etc. So, it's clear that there is a wide array of risks involved in the stock market which an investor should be aware of, as all this would impact the investment returns as well because of the impact on the stock price.
Ultimately, it's all about understanding and managing the risk in order to avoid incurring losses on your hard-earned money. In the next article, we’ll deep dive into the ways to manage stock market risk.
- 5. Headline Risk
Headline risk is the risk that stories in the media will hurt a company's business. With the endless torrent of news washing over the world, no company is safe from headline risk. For example, news of the Fukushima nuclear crisis in 2011 punished stocks with any related business, from uranium miners to U.S. utilities with nuclear power in their grid.
One bit of bad news can lead to a market backlash against a specific company or an entire sector, often both. Larger-scale bad news such as the debt crisis in some eurozone nations in 2010 and 2011 can punish entire economies, let alone stocks, and have a palpable effect on the global economy.
- 6. Detection Risk
Detection risk is the risk that the auditor, compliance program, regulator or other authority will fail to find the bodies buried in the backyard until it is too late. Whether it's the company's management skimming money out of the company, improperly stated earnings, or any other type of financial shenanigans, the market reckoning will come when the news surfaces.
With detection risk, the damage to the company's reputation may be difficult to repair; and it's even possible that the company will never recover if the financial fraud was widespread (Enron, Bre-X Minerals, ZZZZ Best, Crazy Eddie's, and so on).
- 7. Model Risk
Model risk is the risk that the assumptions underlying economic and business models, within the economy, are wrong. When models get out of whack, the businesses that depend on those models being right get hurt. This starts a domino effect where those companies struggle or fail, and, in turn, hurt the companies depending on them and so on.
The mortgage crisis of 2008-2009 was a perfect example of what happens when models, in this case a risk exposure model, are not giving a true representation of what they are supposed to be measuring.