Stock Market For Novice

Introduction to Stock Market

As is a well know fact that people who indulge in business generally earn more then service class people. Everyone of us cannot start a business, but we can certainly invest in some business and watch our money grow in it. Stock market gives us such an opportunity. We can purchase shares of a company in the stock markets and become a partner in its growth. And moreover, we don't actually have to worry about its day to day working.

Short and Long Term

Stock markets have made and broken people in the past. Stocks have high returns but with high risk. Investing is stock markets takes a lot of time and research. Typically, there are two kinds of investors in the stock market. First, who takes advantage of the speculation in the market to earn money. Other who stays invested in for a long time and makes profit out of it.

Short term investment is risky and meant for experts who understand the market sentiments. For people like us it is a good idea to either buy stocks of a large cap company and stay invested for a long time. Although in short run we might see some losses but in the long run we stand a great chance of making a neat profit. In both cases, short and long term, we should keep an eye on the news related to the company whose stocks we have purchased. Some news might affect companies stock prices for a short term and while others might have a long lasting effects.

For example, Suppose person A bought shares of Solid Cars at a price of INR 50 per share. Invested INR 100000 to buy 2000 shares. Now suppose the company declares tremendous profit in the last quarter and announces to setup one more plant to double the manufacturing of the company. Everybody will jump into it and the demand for the shares increases suddenly. Prices shoots up to INR 70 per share in a single day. Now suppose person B buys 2000 shares by investing INR 140000, speculating that the prices will further increase. Now government rejects the Solid Cars' proposal to setup the new plant. Prices slips and goes to INR 60 per share again. A's worth is 20% more then invested while B's worth is 14% less then invested. A is positive in the long run while B is at loss in the short term.

Diversification to Mitigate Risk

The risk with the equity market, primarily comes from the fact that the stocks that we purchase are generally not diversified enough. With the small amount of money that a retail investor invest in the share market, getting diversity in terms of the domain and company is difficult.

This is where mutual fund come into picture. Mutual fund companies take this small amount of money from many investors and then put it in the stock market. As they have large amount of money to invest they can diversify the investment and thereby reduce the risk.

In later posts we will see how to decide which mutual funds to go for.

What You Need to Invest in Stocks

Now if you don't have any experience with the stock markets then you must be wondering how and where can you purchase stocks. I swear, you don't need to go physically to the stock market to purchase stocks. You can trade in stocks sitting at your home or in the office (if your boss permits so). For that you need few things,

1. A demat account - to keep shares and derivative contracts
2. A trading account - to buy sell equity, options, futures and other derivatives
3. A PC connected to the internet

A demat account is similar to a bank account where you can keep your shares instead of currency. A trading account is an account to do buy sell transactions. So if you have both, a demat and a trading account, you will place order through your trading account and the shares or contracts, that you buy or sell, will be put into or taken out from your demat account based on your order.

Demat and trading accounts are provided by investment companies like ICICI Direct, Kotak Securities, Reliance Money, Indiabulls. Almost all the securities firms charge some money every year to manage demats and trading accounts. It is around INR 500 per year. Apart from this they charge brokerage on each transaction which is almost zero if the trade is squared off the same day. The financial companies may have some other charges also depending upon the type of product that they are offering.

Have Faith, Invest In Stocks

Almost every technical analyst in the world is betting on India. And the analysis is not just like that. There are some facts which prove that investing in equity, here in India, is truly beneficial.

15% is what the sensex, an index maintained by Bombay Stock Exchange (BSE), has grown at since its inception in 1980 when it started with 100 points which is also a reflection of corporate earnings growth. And now that India had crossed the development threshold, it is certain that we can earn at least 20% in the next 15 years by carefully selecting the stocks or scripts. Though the risk is always there but current trends are showing signs of prosperity.

You should definitely take experts' advice if you don't have time due to job constraints. But as I said just take advices and make your own cautious decision. The best way to do that is to invest through equity based mutual funds, insurance plans, pension plans etc. Checking for top performing funds over the past three years is a good idea to get started with.

Following table shows projected accumulation of money assuming a monthly investment of Rs. 1000.

Period of Investment (in Years)	Money Invested	Accumulated Money (Assuming 10% Growth)	Accumulated Money (Assuming 15% Growth)	Accumulated Money (Assuming 20% Growth)	Accumulated Money (Assuming 25% Growth)
10	120000	206552.02	278657.27	382363.55	532804.66
15	180000	417924.27	676863.09	1134294.9	1955784.78
20	240000	765696.91	1515954.97	3161479.37	6859095.24
25	300000	1337890.35	3284073.74	8626708.15	23754941.59
30	360000	2279325.32	7009820.61	23360801.76	81974714.95

The table clearly shows that if we start investing early there are good chances that we will have a bright retirement ahead. Take for example, if you are 30 years of age and invest systematically till you are 60 i.e. for 30 years then the accumulated sum is around 70 lakh assuming growth of 15% and more than 2 crore assuming growth of 20%. If you wait for five years and then start investing and planning to retire at 60 then you will have less than 1 crore even if the average growth is 20%. So start early is the mantra.

To start planning, suppose your monthly expenses excluding any type of loan is around 20K. And if inflation is flat 5% all through 30 years then you would need around 90K every month that time. Which means around 11 lakhs every year. And suppose if you want to buy annuity for pension at that time which gives 5% pension then we would need a corpus of around 2.2 crore. By looking the table above if 1000 rupees is invested every month for 30 years and assuming growth of 20% then we can easily accumulate this amount. If the growth is 15% then we need to invest around 3500 rupees every month to accumulate approximately 2.2 crore.

You can adjust figures according to your age and the time you want to retire. Age of retirement can be decided by you but mininum age is different for different investment companies. For some it is 40 (LIC of India) and for some it is 50 (HDFC). And also not all companies have equity linked pension plans and mutual funds.

I hope that the post will be useful to many of you in planning your retirement.