Skip to main content

Investing in Stock Market – Beginners Guide

Introduction


After doing his MBA, Naresh has recently joined a MNC. Naresh has been reading about the frenetic rise in the stock markets from 17k levels to 20k levels. He has been reading in the newspapers how equity investors have increased their wealth with the phenomenal rally in stock prices. Naresh also wants to invest a certain portion of his salary in equities every month. But Naresh doesn't know anything about the stock markets. He doesn't know how stock markets work, what influences the prices of individual stocks but at the same time by not participating in the stock markets he is feeling left out. Do you also feel the same? Then don't worry. This article explains the different ways of investing in stock markets.

What is a Stock Market?


Stock Market or Stock Exchange is like an intermediary which brings the borrowers and lenders together. There are 2 types of markets.


Primary Market: Companies that want to borrow money for expansion, working capital, acquisitions, debt repayment etc come to the stock market with an equity issue. When the company hits the market for the first time it is known as an Initial Public Offering (IPO). Lenders who want to lend money to these companies can do so by subscribing to shares of these companies. This is known as the primary market when the company is in the process of getting listed.


In return for the capital raised from investors the company offers them a certain percentage of ownership in the company in the form of shares. Shares represent fractional ownership of the company. The percentage of ownership is directly proportional to the number of shares held.


Secondary Market: Once the gets listed, its shares start trading in the secondary market. In the secondary market buyers and sellers come together for buying and selling shares of listed companies through the stock exchange. The demand and supply of these shares and the financial performance of the companies decide the prices of the shares of that company.

What are the Ways in which one can Invest in the Stock Market?


"The beauty of investing in the stock market is that for every Buyer there is a Seller and they both think they are clever". The following investment options are available for investing in the stock market. Let us have a brief look at them


1) Direct Investing in Cash Markets


To use this route of investing in the stock market, the investor first needs to open a demat account through a broker. Once the account is opened the investor can start trading (buy or sell) in shares. The orders can be placed through phone by calling up the broker or by visiting the broker's office or directly through the broker's website. The Cash Market segment can be used to trade with a relatively less amount of risk.

2) Derivatives – Futures


A Futures Contract is basically a Contract between 2 persons for Buying / Selling an asset of a fixed quantity and quality at a specified Future Date at a price Fixed Today.
For example a Person X wants to buy 100 shares of Reliance Industries, 2 months down the line. So he can get into a contract with another Person Y who agrees to sell 100 shares of Reliance Industries to him 2 months down the line. This is an example of a Futures Contract. Even though the delivery of Reliance shares and the payment will be made 2 months down the line, however the terms and conditions of the contract like the quantity of shares, price of shares and the date of delivery will be decided today itself i.e. the date of getting into the contract.
Investing in futures involves picking a direction in which the stock price is expected to move and the extent. This is the Riskiest / Most Rewarding of all investment options mentioned here.

3) Derivatives – Options


Options are a contract between 2 persons that gives the buyer the right but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date. To invest in options you can take a Long Position (buy a Call) of a specified Strike Price if you expect the price to rise. Else you can take a Short Position (buy a Put) of a specified Strike Price if you expect the price to fall. Since you are not obligated, it means that the Profits are Unlimited but the Losses are Limited.
In Futures Contracts the profits as well as the losses are unlimited, depending on the direction in which the price of the stock moves. But in case of options, when options are bought the profits can be unlimited but losses are limited. So for a person who wants to take limited risk, options are the preferred way to trade in the derivatives market.

4) Mutual Funds


Mutual fund is a Collective Investment Scheme that pools money from numerous like minded investors and invests that in various investment avenues as per the scheme objective. The unit value (NAV) depends on performance of the securities in which the fund has invested. This a good option for those who have a limited risk apetite. Based on the investment objective of the scheme it can either be an equity fund or debt fund or a balanced fund.

5) Insurance – ULIPs


ULIP stands for Unit Linked Insurance Plan. ULIP is a life insurance solution that provides for the benefits of protection and flexibility in investment. The investor can choose to invest his money in an equity fund or debt fund or balanced fund. The investor can also switch his money from one fund to another fund. The fund value (NAV) of the policy depends on the value of underlying assets at that point of time.

6) Exchange Traded Funds (ETFs)


This is a recent phenomenon and is gaining popularity rapidly. ETF's are like Mutual Funds but are very flexible, don't have a minimum investment attached to them, can be traded on the Stock Exchange during market trading hours.

Conclusion


We have looked at what are Stock Markets and the various ways of investing in the market. So now you and people like Naresh who have no idea or little idea about ways on investing in the stock market can choose from any of these 6 options to invest in the stock market. Ideally if investors don't want to take risks they should invest through mutual funds or ULIPs. The investment decisions in these are taken expert Fund Managers who understand the markets very well and have lot of experience of handling big investments in stock markets. In the next part of the series we will be reviewing these investment options in detail individually and how to make money using these options. What are the Risks involved? What kind of returns can we expect? Till then happy investing!!! 

 

Popular posts from this blog

Surrender ULPPs

  ICICI Pru LifeTime and ICICI Pru Lifestage are Unit Linked Pension Plans. Such insurance linked retirement plans are neither good investments nor do they offer sufficient insurance cover. As you can see, these have turned out to be bad deals. In the Lifetime plan, the fund value is not even equal to the total premiums that you have paid and in the Lifestage plan your return is just about 6% which is quite low. The mortality charges are as per your age which is why they have increased. Moreover, once these plans matures, you will have to compulsorily opt for annuity (regular income) and the annuity rates are generally modest. Assuming these plans mature in the next one year, it will be wise to surrender the plan now and curb your future commitments.   Before you choose to buy a term plan, you have to consider a few points. You need to insure yourself, only during the time you are working and your family is financially dependent on you. At the age of 59, not all insurance companies w...

Sundaram Mutual Fund new plan Sundaram Fixed Term Plan CJ

Sundaram Mutual Fund has announced the launch of a new fund named as Sundaram Fixed Term Plan CJ. The new issue will be closed for subscription on January 30. --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.   Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)   Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications   These Application Forms can be used for buying regular mutual funds also   Some of the best Tax Saving Mutual Funds available are: 1. HDFC TaxSaver 2. ICICI Prudential Tax Plan 3. DSP BlackRock Tax Saver Fund 4. Birla Sun Life Tax Relief '96 5. Reliance Tax Saver (ELSS) Fund 6. IDFC Tax Advantage (ELSS) Fund 7. SBI Magnum Tax Gain Scheme 1993 8. Sundaram Tax Saver   -...

Group Health Insurance

Buy Group Health Insurance Online   For Human Resources, the biggest challenge today is to decide whether medical benefits should be offered to employees or not, what type of plans should be offered, what will be the cost and how will the cost be split between employees and employer. Well, most of these are subjective and would depend on a lot of factors including company size, average employee salary, etc. However, this article will give you a fair idea on how you should go about deciding these factors: 1. Why offer group health insurance benefit to employees : Studies have proved that retention rates among employers offering GHI are much higher than the ones who are not offering. Moreover, the cost of providing this benefit as a percentage of salary is very low as compared to the perceived value. As an example, say if average salary of an employee in your organization is 4 LPA. If you decide to offer a health insurance benefit to him for a Sum insured of ...

Commercial Paper (CP)

Invest Mutual Funds Online Download Mutual Fund Application Forms Commercial Paper (CP): These are issued by corporate entities in denominations of Rs.2.5mn and usually have a maturity of 90 days. CPs can also be issued for maturity periods of 180 and one year but the most active market is for 90 day CPs.   Two key regulations govern the issuance of CPs-firstly, CPs have to be compulsorily rated by a recognized credit rating agency and only those companies can issue CPs which have a short term rating of at least P1. Secondly, funds raised through CPs do not represent fresh borrowings for the corporate issuer but merely substitute a part of the banking limits available to it. Hence, a company issues CPs almost always to save on interest costs ie it will issue CPs only when the environment is such that CP issuance will be at rates lower than the rate at which it borrows money from its banking consortium. ----------------------...

Why credit history is critical?

Will you need a loan to buy a car or a house? Do you know why some people get their loans sanctioned quickly without any hassle, whereas others find that their approval is delayed or their application is rejected? If you want a loan, you will need to work to build a solid credit history because this can have a bearing on the ease with which you get loans. Read on to learn more about what is a credit history and how to build a good credit score. What is a credit history? Your credit history is a way of tracking your credit behaviour and habits — basically it shows how disciplined and regular you are when it comes to repaying your dues on loans that you have taken. It will show a complete record of your past borrowing and repayment record including details about any late payments or if you have defaulted on a loan. This track record is readily accessible to lenders and is used by them to when reviewing your loan application. Borrowers who have historically had a bad record of managing...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now