Stock Market and Investment is a widely used term. It is like an ocean where proper approach and discipline is needed to ride a wave.The article will give you a broad perspective if you are a beginner to investing in the stock market.
What is the Stock Market?
Before we discuss the stock market, let’s discuss the market in the first place. In layman terms the market is a place where buyers and sellers come together. They meet in person or face to face and an exchange of goods or services happens at an agreed price. The price depends on multiple factors, the basics being demand and supply. The price goes up when there are more hands chasing fewer or limited products. Similarly the price goes down where there supply is abundant but less hands chasing the product.
Similar mechanism works in the stock market but unlike what we discussed just now. The stock market is an electronic form of market where there are market participants like buyer and seller. They buy and sell a share of the company, say Reliance or Tata Motors at an agreed price. The exchange of shares happens between buyers and sellers who are unaware about the other person. The exchanges like BSE and NSE enable investors to trade in equities (cash market), currencies, debt instruments, mutual funds, etc. There are many other roles of exchanges like risk management, clearing, settlement, and investor education.
Brokers like Zerodha, Upstox, etc and many others provide a platform where buying and selling of shares happens. They also act as a mediator between buyers and sellers. The role of depositories like NSDL and CDSL is to keep the shares with them in electronic form.
Why to Invest in the Stock Market?
Well the “Why” would vary from individual to individual but we will discuss for the sake of the reader at large.
We all have heard about the term “Inflation”. In layman terms it refers to a rise in price of a product or services which we consume for daily purpose or occasional as per the need, want and demand. So every country has their own inflation figure e.g. India has historical average of 4% to 5% p.a. (this may vary at the time of reading the article) commonly known as WPI or CPI which we use as a parameter to calculate a rise in price but the ground reality is inflation cost varies from individual to individual and from product and services we use.
Coming back to our topic we have used inflation in our context because traditionally we have a habit of keeping money in a savings account which grows at 2.5% to 4% varies from bank to bank and it kills our money brutally being upfront and decreases the value. So ideally one should invest to keep the present value of money intact and to beat inflation.
Investing helps in wealth creation as saving alone cannot make your money grow. Investing helps in achieving the financial goals that one plans over a period of time.
Traditionally instruments like RD/FD give an average interest rate of 4.5% to 6%, Saving deposit gives from 2.5% to 4%, Bonds give around 7% to 9%, Gold give around 7% to 10% which is much lesser than Index Fund which gives around 11% to 13%. So the message is very clear by now.
How to Invest?
Well I will try to give you a basic roadmap for how to get started.
Begin with opening of a basic saving account with any bank if you do not have one and then open a Demat account with broker either offline by visiting any bank branch and approaching any official or online at the convenience of you home through Zerodha, Upstox, 5Paise, etc. there are may just google them and keep your KYC(PAN, Aadhar) handy.
Once you open your bank and demat account just login to your broker trading portal and you are all ready for purchase of shares of the company you know. For the beginner it is advisable to avoid trading with a huge amount as due to lack of knowledge there is a risk of losing your money so anyway if you want an exposure start with your pocket money amount by buying shares of a well known company and feel the ride.
The best you can do if you are new is to do SIP from the same broker platform or there are many apps like Groww, where you money is being managed by a fund manager who holds expertise and has required education and skill and see the magic here too.
Benefits of Investing
Well there is no end to the benefit of Investing if done in a disciplined manner and by following proper approach. It can not only help you in meeting financial goals but can also make you financially independent. The opportunity is immense and the journey will only give you a positive return both monetary and non-monetary. It will define your character when there are downs in the market as any tom, dick and harry can mint money when the market is rocketing.
The benefit can be observed from the fact that in a developing country like India the market participants in percentage terms would be around 3% to 5% maximum but the number shoots up when it comes to developed countries like the USA where participants would be around 55% approx.
So in a nutshell Investing can help you in wealth generation and creation. Investing is said to be a good hedge against inflation as we discussed earlier that inflation kills money in saving deposits so to grow the value of money it is necessary to allocate money in an instrument which beats inflation.
There is an interesting fact that the well- known and one of the richest value investors Mr. Warren Buffet holds a major share of Coca-cola and his dividend income annually is more than the CEO of the Company. So we can arrive at the fact that investing can help you in generating both passive income like dividend and active income by selling or trading when price appreciates.
As mentioned earlier there is no end to benefit but above discussed can give you a basic blueprint.
Things to Consider while investing
There are various things which can be considered for investing and the factor varies from person to person.
The financial goals of the person like higher studies, vacation, purchase of house or car, etc. can be considered while investing as more the number of goals a person has accordingly fund has to be allocated to generate return. The goals can also depend on tenure like short term and long term.
The other factor which can be considered is monthly or yearly budget which is the amount spent on expenses and leftover amount spent for saving. The ideal way should be to keep money aside first for investment and then spend the leftover amount.
Risk appetite of the individual can also be considered while investing. Higher the risk appetite, higher the return can be generated by investing in IPO or mid cap and small cap stocks and lower the risk appetite then large cap stocks can be preferred for investment as they are mostly stable and less volatile. Since the market is volatile it comes with ups and downs.
The opportunity cost can also be considered while investing as the amount could have been used for consumption or some other purpose. So no matter how important the opportunity cost is, one must always develop the habit of investment.
Wrapping it up
The above topic gives us a fair idea on how to get started. Investing is a serious profession in itself which comes with a lot of risk and reward. The beginner has to be very careful when it comes to investment. The investment is a widely spoken but underrated practice which is mostly linked to saving. The purpose of the article is to grow the money and not just save by keeping it in a bank account. The proper approach to investment would reap the benefit in the long term which is beyond imagination. Therefore it has to be followed religiously and not to be considered a money minting activity.