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Embarking on the journey to invest in the share market is an exciting and potentially rewarding endeavour. However, it can also be daunting, especially for beginners. Understanding the fundamentals of share market investing is crucial for making informed decisions and navigating the complexities of the financial markets. In this guide, we will explore the essential concepts, strategies, and tools one needs to know to start investing in the share market confidently and effectively. Be it a newcomer seeking to dip their toes into the world of stocks or an experienced investor looking to refine their skills, this guide will provide valuable insights to help succeed in the share market.
Table of Contents
Reason Companies Issue Shares
Issuing shares to the public is one of the most effective ways of raising capital. Capital can exist in the form of cash, buildings, machinery, inventory, and other types of assets. It is the backbone of every business; without capital, companies will be unable to carry out expansions. When a company starts, it may raise capital by taking on debt and pitching its business to private equity firms. However, after a company reaches a particular stage of growth, issuing shares to the public through an initial public offering (IPO) is probably the best way to raise funds or capital.
Opening a Trading and Demat Account
If one wishes to start investing in the stock market, they will first need to open a Demat account and a trading account. A Semat account is mandatory to store stocks electronically, while a trading account is required to make transactions. If one is a holder of an Indian PAN card, they are eligible to open the said account. These accounts can be opened online with a SEBI-registered stockbroker like Share India.
To initiate the account opening process, head to the broker’s website or app, and read through the steps provided by the broker to open the accounts. The steps are straightforward, so there is nothing to worry about here, but don’t forget to evaluate the broker’s charges and brokerage rates. Brokerage is a fee the broker charges for letting customers use their platform to make transactions. At the time, also find out about the broker’s services before opening a Demat account and trading account with them.
Investing in Primary and Secondary Markets
As a Demat and trading account holder, one should be aware that there are two ways to purchase stocks. One can either invest in the primary market when shares are being issued or invest in the secondary market once the share has been issued.
Investing in the Primary Market
When one invests in the primary market, one is essentially investing in an IPO. The primary market, or the IPO market, is where companies issue shares to the public for the first time. So, by investing in the primary market, one is getting shares at a price decided by the company.
Investing in the Secondary Market
After issuing shares in the primary market, the company’s shares get listed on the stock exchanges, which make up the secondary market. In India, one can buy shares from the two Indian stock exchanges: the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange). In the secondary market, the price of shares is influenced by demand and supply, which is determined by factors like earnings growth, industry trends, the macroeconomic environment, etc.
The rest of this article will place more emphasis on investing in the secondary market since that is where the majority of investing and trading occurs. However, most points will be relevant to IPO investing as well. For those wanting to learn about IPO investing in detail, consider reading a dedicated article on IPO investing.
Factors to Keep in Mind When Investing
- Having a sound investing strategy or plan is crucial for success as a stock market investor.
- Invest with the right mindset and set realistic expectations, understanding that exponential returns may take several years to materialise.
- Understand the risk profile before investing in stocks and assess how much risk one is willing to take.
- Remember that the stock market always looks forward, so invest in the right stocks rather than the best ones.
- Consider using a brokerage calculator to estimate potential expenses and returns when making investment decisions, ensuring alignment with financial objectives and risk tolerance.
Picking Good Stocks
In the long term, the price will follow the earnings, so companies generating growth in their profits will see their stock price do well. However, investors seek to identify such companies in advance where there is a potential increase in earnings visibility.
To put it in another way, the market often already prices in the positives that could lead to appreciation in a stock’s price. As a result, as previously stated, it is not a matter of selecting good stocks but of selecting the right stocks.
Based on investing goals, one determines whether a stock is suitable. For instance, if investing for a 2-year period, it’s impractical to invest in a great business when future positives are already reflected in the stock price.
There are two methods to identify the right stocks: fundamental analysis and technical analysis.
- Investors primarily focus on fundamental analysis, which involves studying the business and factors affecting its stock price.
- Conversely, technical analysis predicts stock price movements by analysing price charts.
When evaluating stock investment strategies, it’s essential to consider a company’s fundamentals and factors influencing its stock price, primarily through fundamental analysis.
Performing Fundamental Analysis of Stocks
- When investors analyse the fundamentals of a company’s stock, they understand the business and financial strength of the underlying company, the scope to upscale, the triggers that can lead to revenue and profit growth, and the risks that could hamper the company’s business plans.
- As an investor, it’s essential to learn to interpret financial statements like earnings reports and balance sheets. Additionally, listening to management interviews and reading research reports on the company or relevant industry can provide insights into the company’s growth plans.
- Evaluating the valuation of the company’s stock price is the final element of fundamental analysis. Investing in an overvalued stock where the positives are already priced in may result in no significant gains. Conversely, blindly investing in an undervalued stock without understanding why it’s undervalued can also be risky.
- There are several valuation ratios investors can refer to, such as price to earnings ratio (P/E ratio) and price to book ratio, to evaluate the valuation of the company. Utilising financial planning calculators can also help investors calculate metrics like dividend yield and compound annual growth rate (CAGR).
Risk Management Measures
Even the best of the best investors can go wrong, and that makes risk management an important aspect of investing. Yet, risk management happens to be one of the most ignored aspects of investing. That said, one of the best ways to manage risks is to diversify the investment portfolio. One can diversify the equity investment portfolio by buying stocks from different sectors and having the right balance between value and growth. At the same time, avoid over-diversifying, or else it will become difficult to manage the investments. Other ways of managing risks include respecting valuations and tracking the company closely.
Conclusion
To start investing in the stock market, it’s crucial to evaluate the risk profile and determine suitable investments. Constructing an investment strategy based on thorough due diligence and investing in businesses that one understands while adhering to strict risk management measures can help limit downside risks and ensure long term profitability. Additionally, considering alternative approaches like algo trading, which involves using computer algorithms to execute trades automatically, can provide another avenue for investors seeking to participate in the stock market.