So you wish to make big bucks. Everybody, once in their lifetime, wishes to live the luxurious life just like Leo in The Wolf of Wall Street
Or perhaps you are just looking for a way to gain some extra money and make your life easier like Will in The Pursuit of Happyness.
Whatever the reasons may be, investing in stocks can be a highly profitable thing to do and no, it isn’t gambling. Gambling is depending on luck (mostly) while investing is making smart decisions after looking and analyzing data.
But investing in the real stock market is very different and generally not as easy as portrayed in movies. This article will help make things simpler and help you understand how you can start investing in the stock market.
What are Stocks?
Stock represents the share in the ownership of a company. A company issues its shares by the means of stocks which are made available for the public to buy. When you invest and buy a company’s stocks, you become a partial owner of that company’s profits.
Stocks mainly are of two types:
Common stocks :There’s a reason behind them being named common, it’s because they are the most general kind of stocks. When someone talks about stocks, they are usually referring to this type of stock. A company releases the majority of its stocks in the form of common stocks. They represent ownership and claim over a portion of the company’s profits as well as the right to vote.
Preferred stocks :
Preferred stocks should be considered more like debt rather than actual equity of a company. They represent ownership to some degree but generally without the voting rights that common stocks bring.
Preferred stocks can be bought back by the company at any given point. But in case of liquidation, preferred stockholders are paid off before the common ones. Preferred stocks are less volatile meaning that there’s less risk of losing money due to value fluctuations but at the same time, chances of making profits are less.
Apart from these two types of stocks, companies also release various classes of stocks. Each class represents its own set of customisations. This is mainly done to keep the voting power within a certain group.
Types of Investing
Stocks are just one kind of investment that you can make in the share market. If you are a beginner, they are probably the best way to learn about investing. But apart from stocks, there are five types of investment you can look into if you are planning to invest long-term.
Bonds : Bonds are loans you give to a company or to the government to earn profits in terms of interest. They are usually less risky to invest in but are also less profitable than stocks. Bonds generate a fixed income for the investor and the income is usually sent once or twice a year.
While the Indian bond market is considered to be a “risk-free” one, there are chances that the issuer could default.
Mutual Funds: Mutual funds gather a large sum of money from many investors and a professional manager invests that pool of money into stocks, bonds, and other assets.
Each fund follows its own set strategy for investing and the risk associated with each fund can be measured by the strategy they use. For example, some funds invest only in international stocks while some might invest only in government bonds and others might invest in all.
When the investments collected by the funds’ increases, the value of your investment also increases. This means that you can sell it for profits.
Index Funds: A stock index is a measurement of the stock market which is computed from the average prices of selected stocks. Instead of hiring a manager to invest as mutual funds do, Index funds constantly monitor and track an index and invest accordingly.
Index funds cost less due to them not involving a middle man but just like mutual funds, the risk involved depends upon the individual fund.
Exchange-Traded Funds: They are a type of index fund and work on the same principle of not involving a middle man to do the investing. Exchange-traded funds perform index-tracking and try to mirror it.
ETFs trade just like stocks, meaning that they can be bought and sold multiple times in a single trading day. Mutual funds and index funds prices, on the other hand, are only released at the end of the day.
Options: An option is a contract to buy or sell stocks at a predetermined value in a given duration of time. When you buy an option, you are buying the contract and not directly the stocks. Most options include the contracts of 100 shares of stock.
When you buy a stock option, you have the right to buy or sell it but at the same time are not obligated to do so.
Documents You’ll Need
No matter what you decide to invest in, there are a few things which you will be needing. Let’s have a look,
- PAN and Aadhar card is mandatory to start investing in the Indian stock market. Besides this, the government has also made it compulsory to show six-month of bank statement along with a canceled cheque.
- A broker has to be the one that buys and sells the stocks, you cannot buy and sell stocks on your own. The reason being, brokers are authorised by SEBI to trade on stock exchanges. But understand that brokers do charge a brokerage fee, so be ready for that.
- Demat and trading account is the only place where stocks can be held. To open a Demat account, you will need to show proof of identity, proof of address, proof of income, proof of bank account (this is where bank statement and a canceled cheque will be needed), PAN, and 1-3 passport size photos.
Steps to Start Investing
Before you start investing, taking certain steps can prove to be beneficial for your investing journey:
1. Define your goals : It is important that you define your goals before you start investing. Do you wish to make more money or do you want a source of passive income? Do you want money to buy a car, a house, or something else? This will help you keep yourself in track and not get over-greedy.
2. Formulate a strategy : Once you have a defined goal, it is time to come up with a strategy. Set minimum barriers for you to buy, understand whether you want to play the long game or make it quick and fast-paced. Also, create a good exit strategy and follow it. Make sure that your outline includes money and risk management rules.
3. Read and grow : It’s always good to read some books before entering into any business. The same goes for investing. Not only will you learn to dodge some of the common mistakes, but you will also learn about the different techniques used by titans like Warren Buffett
Some books to start from:
- The essays of Warren Buffett by Lawrence A. Cunningham
- The intelligent investor by Benjamin Graham
- The little book of common sense investing by John C. Bogle
- One up on wall street by Peter Lynch
- The dhandho investor by Mohnish Pabrai
4. Start researching : Start researching the company which you wish to invest in. If you like a company’s product, dig deeper and find out about its parent company, what the current share prices are, and so on. You should also look into testing your strategies and see how they perform.
5. Track your performance : The final step is to ensure that you have a system in place to keep track of all your investments. It can be with a pen and paper or you can use platforms like google spreadsheets.
A few helpful tips
The first advice to take is to invest in the company and not the stocks. This means that you need to invest in only those companies which you know are making profits. Some other tips to consider are:
- Start small, learn and slowly grow your assets. Don’t spend you entire life’s savings in one go.
- Diversify your investments by buying shares in different companies. Also don’t just buy stocks, try out other assets as well.
- Start by playing the long game and investing in blue-chip stocks. Blue-chip stocks are for the companies that have been in the market for a long time, have a good track, and are financially strong. Always play the safe game in the beginning.
- Research for yourself and make an educated guess, rather than solely relying on others words.
- Do not set unrealistic expectations from the market. Keep your goals behind each investment very real.
- Always follow a plan or strategy and have the discipline to do so. This includes closely following your investment rules, risk and money management system, and holding tight to your exit plan.
Wish to learn the ins and outs of the stock market and investing? Sign up for MyCaptain Finance & Stock Markets Workshop.