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.