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

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
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