In this blog, you are going to know how, when, why, and what is share or the stock market. So, read this guide to know everything about share market.
As I am going to start with a question everyone asks:-
How to make your first investment?
Before knowing how to invest we should know that why to invest.
Investment is basically a ownership in a fraction of any business and as the business grows our money grows too and the best part is that it grows in compound interest. It is said “compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pay it”. In the book, Rich Dad Poor Dad,’ the writer Robert Kiyosaki has written that ‘with every dollar that comes to our hand we decide that we are going to be poor, rich or middle class. Poor spend their money, the middle class buys liabilities which will make them spend more money and the rich buys assets ( example stocks, bonds, mutual fund, real estate) which generates passive income for them.’ But some of the investments are rather expensive or difficult to understand so the next question arises is that WHERE TO INVEST? WHERE TO INVEST? The best place to make small investments in the Stock market. Most of the people think that investing in stock market is a gamble this is because they are not well informed about the stock market. By investing in various companies we not only generate wealth for ourselves but also become a part of countries’ development. There are two main stock exchanges in India that make up the stock markets. They are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Besides these two exchanges, there are a bunch of other regional stock exchanges like Bangalore Stock Exchange, Madras Stock Exchange that are more or less getting phased out and don’t really play any meaningful role anymore. Warren Buffett who is one of the richest people on the planet says that it is impossible to lose money in stock market. In a country like India only 3 percent people invest their money in stocks, so before knowing how to invest we should be well informed that WHAT IS STOCK MARKET AND HOW DOES IT WORKS.
- WHAT IS STOCK MARKET AND HOW DOES IT WORKS? Imagine an owner of a company that needs money to grow his business. He can go to some investors and ask them to invest in his company, in exchange for participation (shares of the company). Sometimes the money that the company need is too much for private investors. When that happens, the company need a lot more people to invest in their company, that is when they go to a stock exchange and list their shares so any investor can buy a piece of it. What the stock exchange does, is that it brings thousands of investors that can invest in his company, instead of just handful investors, this is called Initial Public Offering (IPO). These IPOs generates money for the company to invest in some new projects and development and the income or the profit generated by that is given to all the shareholders of the company, which means buying a stock is like investing in a business or being a part of the business in which you see the potential to grow.
Now we can come back to our topic that”HOW TO MAKE OUR FIRST INVESTMENT”. There are different strategies for making the first investment. There are no set rules for that but we can discuss what we should avoid. We should avoid investing on the advice of our friends who don’t know anything about it as an investment is a professional skill and it requires a lot of research. We should also avoid taking a risk in the companies in which we don’t see the potential to grow. That’s why beginners are asked to invest in the mutual funds in which there is a fund manager who is a professional and manages the money accordingly. •What are mutual funds? “A mutual fund is a group of stocks of which are invested in by the client, managed by a mutual fund manager and collectively called a mutual fund by the mutual fund managers company”. – Godric As investors buy individual stocks independently, a mutual fund manager buys individual stocks for investors and puts the stocks and the money together and calls this a Mutual Fund. Mutual funds are considered safer as the money is invested in a lot of stocks so if a company suddenly got bankrupt or the CEO commits suicide then the stock is going to drop drastically but if the money is invested in a lot of stocks then the share is not going to fall that much. But it also has a drawback suppose a share price is rising with a very rapid rate then also the mutual fund is not going to rise at that rate as the money is invested in a lot of stocks. A mutual fund has anywhere from 10 stocks to 50 or more stocks in it to get the desired ‘balance’, ‘average’ or ‘sum’ of the invested stocks. You can have a mutual fund that has all tech stocks. You could have a mutual fund that invests in food and tobacco. You can have a mutual fund that invests in gold, silver and the British pound. They are always creating mutual funds to attract that ‘new money’. Make no mistake, mutual managers are all in competition for your pocketbook. But I will recommend you to buy your own lot of stocks as buying your own stocks doesn’t involve paying 1.5% to 2% of your total investment to the mutual fund company.
- First, we should start making our base portfolio in which we only buy the bluechip stocks to hold for a long run. And for building a base portfolio we should take advice from the professional investors who actively keep an eye on those companies.
There are basically two types of investment strategies:-
- Value-Based – Value Based investment is done on the basis of the value we see in the company (suppose there is a bike whose market value is 50k but you’re getting the same bike in 15k so you’re definitely going to buy that bike this method of purchasing 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.
- Growth based- When a company is growing for a long time and the investor sees a potential in the company to grow at the same rate in the future and the share has performed well even when the economic conditions were not well so the investor invests hoping for the share to grow in the future too then this type of investment is called growth-based investment.
When to invest?
- The best time to buy shares is during the recession or the stock market crashes. There is a saying that “buy when blood is running down the streets”.
- An investment of Rs.10000 (155 USD) grew to Rs.535 Crores (82.9Million USD) in 34 years (In Wipro).
- Instead of buying a smartphone if you’ll invest 30k in the stock market and keep on investing 500 every month then the chances are that the money will be more than 5 crores.
- I would suggest you start with a little amount and start educating yourself about the stock market. The best education will be your experience. There are a lot of sources from where you can get the idea of the shares that you can invest in some of them are really helpful but the most are useless.
- Before starting you will need a trading account. You can open a trading account in Bonanza, IIFL, there are a lot more brokerage firms. Each firm offers different benefits and pros and cons. If you are going to be buying stocks, a primary factor to consider is the cost per transaction for each. Once you’ve created the account you are ready to buy stocks.
- The best three ways to learn how to invest in stocks are getting experience, get you a mentor and to read good books.
- The Intelligent Investor– According to Warren Buffett, this is “By far the best book on investing ever written.” Not a bad endorsement. This is considered the classic text on investing. It is an older book and many of the examples are old and “outdated.” The greatness of the book is that even though it is aged, the content is just as valuable today as when it was written. Chapters 8 and 20 are especially noteworthy.
- Value Investing From Graham To Buffet And Beyond- This book gets into a lot of the nuts and bolts of valuing a business and uses thorough examples along the way. A helpful source for being able to better identify and evaluate companies that are on “sale.”
- The Essays of Warren Buffett “Lessons for corporate America” – A great collection of the business and investing wisdom of Warren Buffett. According to Buffett: “Larry Cunningham has done a great job collating our philosophy. First class.”
- Start reading finance based newspapers and t.v. channels that show markets. Try catching up on how the market works and all the terminology that they use.
- One Up On Wall Street by Peter Lynch- This is an investment classic that will give the individual investor hope. Peter Lynch explains how Wall Street may not be able to find the best investing opportunities from the start and shows step-by-step how the individual investor can find the next ten-bagger.
- Beating The Street by Peter Lynch- Another classic by Peter Lynch, the star mutual fund manager of the Magellan fund at Fidelity Investments. An Excellent book for individual investors looking to tap the stock market for long-term value investment opportunities. A reference to go back to when trying out investing.
- Common Stocks And Uncommon Profits – A Must read! This book explains the investment philosophy of how Philip Fisher finds growth stocks that lead to massive gains if held forever! It also includes his other writings such as Conservative Investors Sleep Well. The book explains the 15 questions to be asked before buying a stock’. I won’t go into too much detail as to spoil the book but this is a great read for any investor. This brilliant book finds forth rank in our list of the 10 must-read books for stock market investors. MENTOR:- Finding a good mentor may be difficult for most of the people we can try to find out the people who are doing this for a long time and should try to take advice from them before making any of the decision.
Hope this helps. I’m happy to answer follow up questions.
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