Investing in Equity and Stock Markets –A Guide for Beginners

Personal finance or more precisely, the art of money making has always appealed to the masses and will continue to be one of the most sought-after sectors in near future. Besides, stock market investment facilitates simple money making for all generations, young to older population, servicemen to businessmen engaged in almost all possible spheres. This article is an easy tour guide to the basics of share investment, primarily targeted towards beginners.

Career_Online_Money

The ever-increasing demand and expenses of day-to-day life have urged common man to arrange enough funds ready to meet future needs, particularly during post-retirement phase. Here, the idea of investment came into picture which addresses inflation (rapid price rise of commodity) since, mere earning and saving the same would result in insufficient funds. The stock market is an attractive investment source whose origin dates to the early 1800s. Generally, companies offer part of their ownership to interested investors in monetary exchange. These investors who buy these company shares (partial ownership) become shareholders of the company. These company shares/stocks are known as Equities which are traded in the stock market. The major factor distinguishing stock market and share market is that the former allows trading of bonds, mutual funds, derivatives and company shares whereas share market allows exclusive transaction of company shares. Normally the dominant incentive for investors to trade in shares is due to the potential higher rate of return on investment which is possible, but the return is also proportional to the inherent market risk. All company stocks can be traded based on their availability in the stock exchange – a common forum for stock buyers and sellers. Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the prime stock exchanges of India. Stock exchanges are categorized into two types, the primary and the secondary. A company raises its shares for exchange in the primary market for the first time as Initial Public Offering (IPO) whereas, already issued stocks are traded in the secondary market.

Equity trading can be processed in both the primary and secondary stock exchanges where the broker efficiently guides the trader to open a demat and an equity trading account prior to venturing. The process of investing in equities is fairly simple as it solely deals with purchasing shares of any company whose shares are likely to witness a price hike. The basic steps to commence stock trading are as follows: –

  • Beginners in stock trading first need to contact a stock broking firm, who acts as a bridge between the traders and stock exchanges.
  • The customer needs to have a demat and an equity trading account ready in hand. The trading account is meant for monetary transactions whereas, the demat account records share transaction history in electronic form.
  • This trading account is then linked with a savings bank account to readily transfer funds necessary for equity purchase. The demat account displays a debit when shares are sold and witnesses a credit when fresh shares are bought by a trader.
  • The firm’s agent stockbrokers then facilitate the process of equity transactions between the trader and stock exchanges and finally the shares of interest are purchased.

New investors however, should always conduct some basic research through quality education and multiple market surveys before venturing into the stock market. Reading several books and articles on stock trading basics is one of the most effective ways to enhance knowledge on stock investing strategies. Stocktrader.com, investopedia.com, Kotak University and nonetheless Google search form the most accessible knowledge hub in just a click away. Regular visits to financial sites like Yahoo Finance and Google Finance and TV channels like CNBC, also play a prominent role in enhancing the knowledge base of prospective investors.  Nowadays, virtual trading with real market data is on the go and several online brokers have launched stock trading simulation platform where the investor can perform virtual trading to master stock investing skills first and later engage in real-time stock trading. This is a very effective attempt to gain success in stock trading with minimal risks involved.

Before buying stocks of any company, it is necessary to scrutinize and narrow down the list of companies in which the investor is presently interested in to concentrate and then pick on the right stock. This can be accomplished by following the basic steps:-

  • First, tracking the official ETF (Exchange Traded Fund) page and holdings of the prospective company which evaluates the company’s present financial status and performance. ETF is a marketable security which follows bonds or commodities and is traded like a basic stock. Holdings refer to the contents of a portfolio of any investor comprising of say, mutual funds, bonds, etc.
  • Then, screening the stocks on the basis of sector (product or service), dividend yield per share and other stock market metrics to ensure maximum profit on return.
  • And finally, frequent browsing through various financial sites, stock analysis articles and TV channels to track the latest news updates relating to prospective company’s performance and then finally taking the decision to invest after critical analysis. Suitable guidance by experienced mentors proves helpful at this juncture and is provided by most online stock broking firms.

Nowadays, online stock broking firms provide 24×7 assistance to their customers to gain real-time insight about the market conditions and the favourable stocks to invest upon. Investment in Equity offers multi-benefits regarding which, the buyer should have prior information. Investing in equities: –

  • Fights inflation: – The prices of day-to-day commodities are on a rise. We need to pay an increased amount for the same quantity of product over a fixed period. Hence, investing is a primary necessity to maintain standard-of-living and also prepare for future.
  • Better than cash: – Simple cash storage is ineffective in beating inflation in the long run and equity investment poses a better solution with attractive returns. However, there is a risk element associated with equity trading.
  • Better long-term returns: – Equity offers long-term returns much better than normal investment/cash storage.

Kotak securities is one of the best stock broking firms of India which offers its customers a holistic list of services to deal with stock trading in a better and efficient manner. Some of these services, which often become mandatory components to effectively trade in share markets, are: –

  • Financial Instruments for trade: – Kotak securities offer trading in shares- equity, preferred shares, debentures, warrants, coupons, mutual funds and bonds.
  • Ease of trade: – Portfolios of both the buyers and sellers are monitored and value-added services and other benefits are provided to investors according to their needs.
  • Investor Education: – Traders are provided with expert assistance by professionals.
  • Research: – The stock markets are regularly studied and reports provided to the customers for better understanding of the present situation and investment prospects.
  • Portfolio Management: – Customer portfolio is managed by officials and prospective investment offers are generated catering to the needs of the same.

However, it is important to note that investments in shares through any platform involves an inherent risk component, since the role of markets and the externalities surrounding such investments play a dominant role in shaping up your returns. Understanding when to enter and when to exit from a share, requires some degree of expertise and frequent study of the shares, even if an individual does not understand technical assessment or valuation of shares.

Author: Chakraborty

Dr Chakrabarty is the Chief Innovation Officer of IntuiComp TeraScience. Earlier she was Assistant Professor of Delhi University, a QS ranked university in India. Before that she has held research positions in IITs and IISc. She holds 2 patents and over 20 publications in her name. Her area of research is in smart technologies, integrated devices and communications. She also has a penchant for blogging and is an editor of Business Fundas.