The stock market has been people’s fascination for over a century now. There are a few important things you should be aware of before you invest in the share market. First of all, stocks work on the principle of compounding effect and provide high returns because of the same. Prerequisites are a trading and Demat account; these are a must to start trading in the stocks.
Well, not to worry! It’s not a stringent process and can be opened very easily online or through any stockbroker offline. You will get to know some more details of how to start investing in stocks as you read further.
What is the Stock Market and How Does it Work?
Imagine there is a company that wants to grow its business. The owner of the company can go to some investors and ask them to invest in his company, in exchange for participation (shares of the company).
Sometimes the money needed by the company is humongous for private investors. Whenever that happens, next, the company needs a lot more people to invest in their company, now the stock exchange comes to the scene. The company lists their shares in a stock exchange so any investor can now buy their shares.
The stock exchange, in return, brings a lot of investors that can invest in his company, instead of just a handful of investors, this is called Initial Public Offering (IPO).
These IPOs generate enough money for the company to invest in some new projects and development and the income or the profit generated by that is distributed as per the investment to all the shareholders of the company.
In a nutshell, buying a stock in a stock market for beginners is like investing in a business or becoming a part of the business in which you see the potential to grow.
How to Approach Investing in Stocks – For Beginners
Stock market investment is all about perseverance and keeping yourself updated. Starting with a conception such as “It’s an easy way of making money” can take a toll on you. Instead, you should be a thoughtful investor and take a wise decision only after knowing the fundamentals of it. You can start investing in stocks with the companies you have knowledge of. Don’t just go by the advice of that friend who doesn’t even know about the company background before investing. How you invest also plays a big role in building your portfolio.
There are basically two types of investment strategies
Value-Based investment, as the name suggests, done on the basis of the value we see in the company.
Suppose there is a car, whose market value is 5 lakhs but you’re getting the same car in 4 lakhs, so you’re definitely going to buy that car instead. This method of purchasing of stocks is called value-based investment.
If the value of a share is less than what we think it’s Value should be then we’ll buy that share and this is called value-based investment. For example, at the present time, you can check HDFC share price or RIL share price if you are looking for value stocks.
When a company is growing over a long period of time and the investor sees potential in the company to grow with the same rate in the future given that the share has performed well even when the economic conditions were not well. In this case, the investor invests hoping for the share to grow in the future too then this type of investment is called growth based investment.
Steps to Start Investing in Stocks
1. Make a solid Investment Goal
It is always better to make well-informed decisions while you invest to have a clear idea of your investment goal. Each investment goal has a different time frame and target capital. You can plan your investments based on that.
Be it for a new car or a new house or for you or your child’s higher education or for your retirement fund. All you need to do is to plan your investments accordingly.
2. Come up with a plan
Now that you are clear with your goal, the next step is to define your strategies to achieve that. You need to define whether you want to invest lumpsum or in the SIP(Systematic Investment Plan) way.
Systematic Investment Plan means investing some portion of your income monthly. You can align the investment with respect to the increment of your income.
3. Read books related to the Stock Markets
Reading books by eminent investors like Warren Buffet or the Intelligent Investor by Benjamin Graham can immensely develop your investment strategy.
4. Choose your stockbroker
This is a very important step in your investment journey as a major part of investors’ decisions depend on the stockbroker. You can also avail of the trading facility online with the help of some popular mobile applications available on the play store to download.
5. Start researching common stocks and invest
Start observing the companies around you. If you like the product or services of any company, delve deeper to find out more about its parent company. Note down points such as whether it is listed on the stock exchange, what is its current share price, etc.
6. Select a platform to track your performance
You can always use an excel sheet to track the stocks. Prepare an excel sheet and track all the investments and returns and also the companies you are interested in.