Stock market is something which everyone should know about and not only know but even participate in. I am sure you must have heard this term, stock market or share market or financial market. There are dedicated news segments and even news channel talking about the stock market all day long. But why? This is because stock markets are one of the most popular and rewarding investment option. However, before you begin to start your investment journey, you myust first get yourself accustomed with the basics of stock market.
This post covers all the basics you need to know before you invest in the stock market.
What is stock market?
The stock market is nothing but a market place for the stocks and shares of all listed companies. You can trade stock for money in the stock market similar what you do in the market by buying or selling goods for money.
Stocks of all the listed public companies is available in the stock market for you to trade. However, unlike the normal marketplace, a stock market functions on the basis of a fixed set of rules and regulations. There are market regulators to look on the activities of the stock market and ensure that there is no discrepancy in any transaction.
Why to invest in stock market?
You must have thought that why do you to even invest in stock markets in the first place. Well there several strong reasons for you to do this. I am sure you won’t want to work for your entire life to pay off your bills. You would also like to spend on luxuries, buying the car you always wanted, buying your dream car, vacationing at your dream destination or even take a world tour. But how will you finance all these? How will you ensure a peaceful retirement?
This is where investing as a habit comes into play. If you have a been a disciplined investor for atleast 20 years of life, I guarantee you, you would be able to do all these things. And not that 20 years is just a safe number you may even be able to achieve all this within 5 years if you do things right.
However, there some other ways of earning money as well. You may read our article on ‘Best passive income ideas in 2021 to earn $5000‘ to know more about the earning opportunities available.
Basics of stock market
Having learnt what stock market means and why is it important to invest in the stock markets, lets turn our attention to the basics of the stock market. There are certain jargons which you must know to actually l learn about stock markets. So let’s first learn these terms.
A stock exchange is the real place where the trading is carried out. In india, there are 22 national stock exchanges and many regional ones. The two mains stock exchanges in India are Bombay stock exchange (BSE) and the National Stock Exchange (NSE).
Stock Exchange Indices
Stock exchange indices are the indicators of overall mood of the market. In India, there are two main indices, the Nifty which is the index of NSE and the Sensex which is the index of BSE. There are several sector index as well. These indices are formed of the top 50 and top 30 companies respectively.
There are mainly two kind of shares. The first one being the equity shares and the other preference shares. The equity shares are the ownership shares of a company. These shares carry the real rights. The form the capital base of the company. Equity share owners have voting rights. They also get profits in the form of dividends. However, it is not necessary for a company to announce dividend for the equity share owners.
Preference share carry some preferential rights. This includes a fixed rate of dividend given on the face value of the shares whenever a company makes profit. They also get back their capital at the time of winding up of the company. However, they are not the owners. They din’t have any ownership rights.
Dividend is nothing but the profit of the company which gives it to the shareholders. A company may announce dividends for its shareholders in case it has gain sufficient profits. However, it is not compulsory for a company to give dividends. It may decide to use the profits for further expansion or for future use. However, in case of preference shares, dividends are always given whenever profits are earned.
Whenever, the markets rises, it is called a bullish trend. Investors who are optimist about the growth of the companies, and stake their money in hope of going the prices high are called bulls. Bulls buy at cheap and sell at high. The difference between the price they had purchased and the price they had sold is their profit.
Whenever, the market slides down , it is called a bearish trend. Investors who are pessimistic about the growth of the companies are called bears. Bears buy at high and sell cheap. The difference between the price they has bought, which is higher, and the price at which they sell, which is lower, is their profit.
Short selling is a complex term and a very important one if you want to really know the stock markets. It means you sell the shares when the price is high and as soon as it drops you but it back. Think of it as selling a thing which you don’t actually own. But as you know the real owner you are acting as a middlemen. However, there are certain complications while you do short selling which you must take care of else it might be very painful for you.
Position Square Off
Square off means that you have closed or settled your position. This means there is nothing due from your side. It is important to square off your position daily in case of intraday while in case of long term, you can square off your position when you sell your shares. If you default on squaring off then you may be penalized heavily, so keep that in mind.
Intraday trade means buying and selling stocks within a single day. This means you have to square off your position in that particular trading day itself. You cannot carry any of your trades to the next day. If you do not square off yourself than your broker may do this himself. Intraday trading is not recommended if you are beginner or if you cannot devote much of your time in this. This is because in case of intraday trading, you have to keep an eye on the movement of your invested stock and wait for the right opportunity.
However, if you have some experience then you can try intraday trading as it has higher earning potential but is more risky at the same time.
Longterm trading means buying shares and holding them for a long period time unless they give great returns. This is the route which most people take ans is recommended for beginners. It is less risky and much more rewarding. However, you must be patient in this case.
Face Value of Stock
Face value or par value, of a stock indicates a shares’s fixed denomination. The face value is important concerning a corporate action.
52 Week High/Low
It is the highest point at which the stock traded during the last 52 weeks and similarly the ;lowest point at which the stock has traded in the last 52 weeks. The 52 week high/low gives a sense of range within which the stock has traded during the year.
Demat account or dematerialized account is the place where all the shares that you but are stored in the dematerialised manner. Earlier, the shares where traded using physical share certificates which needed to be stored in warehouses. However, now this is done using demat account.
All the trades at the stock exchange are settled by the stock exchange at the end of the trade cycle. In India, the trade cycle is of T+2 days. This means that all your transactions will be completed in two days from the day of your transaction. So, if you buy shares on Monday, it will be credited to your account on Thursday. Two days, namely Tuesday and Wednesday will be require to complete the trade in this case. However, this does not mean that you need to wait for one trade to get completed. You can trade as you wish and the transactions will get settled o their own.
This was the basic terminology which you need to know before you start. There are some other terms as well. But that you would learn yourself once you start investing in the stock market. For now, this much is enough.
How to start investing in the stock market?
To invest in the stock market, you will need a demat account and a trading account. You can these accounts from your broker who is a registered individual with the stock exchange. In India, there are several brokers available. Some of them include Zerodha, Groww, and Upstox.
These are good platforms to learn and begin if you are a beginner. Zerodha in particular, is the beast trading app available in the market.
Once, you have got your demat account, you can start buying shares. You can buy the share sof any comapny you want. However, don’t just invest blindly or at someone else’s advice. Do some research on your own before investing. This is the best way to grow your money.
How to chose stocks for investing?
If you really want to earn some good money, then you need to invest in the right stock. A good share may prove to be a multi-bagger for you and can fulfill all your dreams in just a few years. However, finding such a great stock is not easy.
You can use certain tools and follow certain steps to find the right shares which will give good returns. Two of the best ways of finding a good share are:
- Technical Analysis
Technical analysis means examining the historical price trends and finding patterns in the price movement of stocks to predict how they will perform in the future. It is based on the ideology of history repeats itself. So if a stock had done well in the past it would continue to do so.
Technical analysis uses a lot of charts and graphs such as the candle stick charts to know about the performance of stocks. It gives a broad ides of a share and is an easy way of finding good stocks.
However, it might not give you deep insights about a stock. This because technical analysis does not take into account the more core factors such as Price to Earnings ratio, or other corporate actions.
- Financial Analysis
Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment.
It takes into account all the performance related issues to determine how a stock will perform. But at the same time, it is much difficult especially for beginners.
Learning the basics of the stock market and investing in it may prove to be the best decision of your life. As soon as you start, the more better it is for you. Stock market is know to create fortunes but this solely depends upon how discipline you are. If you want good returns you have to keep investing in a disciplined manner. Don’t hope that you will become an overnight millionaire. Let compounding do its job and you will surely see the benefits.