1. What is Stock Market?
Stock market is where company stocks or shares are bought and sold. Stock market is where people invest their money and businesses raise money to expand their business.
The stock market may seem complex, but if you know the fundamentals, it is easy. There are two major types of stock market:
Primary Market: When a company floats its shares to the public for the first time, that is IPO (Initial Public Offering).
Secondary Market: In this, previously issued shares are bought and sold. If you buy shares of a company, it happens through the secondary market.
By the stock market, investors have an opportunity to become part of the growth of companies. And it can yield returns to the investors too, but there is risk involved too.
2. Shares vs Stocks
Shares and stocks are the same thing for many people, but there exists a difference between the two subtly.
- Shares: If you buy shares of a company, then you own a portion of the company. That ownership can be beneficial in terms of voting and dividends.
- Stocks: Stock is a blanket term to denote shares of a company. If you are writing “I own stocks in XYZ company,” it means that you buy shares of XYZ company.
The value of stocks and shares fluctuates according to the performance of the company and the situation in the market. If the company is doing well, the value of the stock increases, and if the performance of the company is not good, the value of the stock decreases.
3. Benefits of Investing in Stock Market
There are several benefits of investing in the stock market:
High Returns: The stock market can give historically high returns, especially for long-term investments. If you invest regularly, your returns also increase because of the compounding effect.
Liquidity: The stock market is highly liquid. This means that you can sell your stocks at any time and receive money very quickly.
Diversification: By investing in the stock market, you can diversify your investments, which will help you handle risk. You can diversify your portfolio by buying shares from various sectors and firms.
Ownership of Companies: When you buy stocks, you own a company, where you get benefits in the form of dividends and voting rights.
Compounding Growth: When you reinvest your earnings, you get to experience compounding, which makes returns even on your initial investments.
4. Risk and Reward in Stock Market
When we are considering stock market, the term risk and reward emerges in our minds. There is always risk involved in stock market, but you can manage your risk if you follow the proper method.
- Risk: The largest risk of the stock market is that the stock prices may go up and down at any given time. When the market crashes, your stock values also go down. Economic downturn, political conflicts, and company problems also influence the stock prices.
- Reward: If you are on a long-term investment policy, you can earn good returns. Historical performance indicates that in the long run, the stock market has yielded more than inflation, if you invest in a diversified fund.
- Risk Management: To prevent risk, you must know your investment policy. Diversification, market research, and proper financial planning reduce risk.
5. Stock Market Key Players
There are numerous market players in the stock market who direct the market. These players fix the market liquidity, price discovery, and performance as a whole.
- Investors: Investors are individuals who maintain stocks for their long-term valuation. They seek capital appreciation or dividend.
- Traders: Traders trade the stocks for near-term profit. They trade quite often and seek price fluctuations.
- Brokers: Brokers are those persons who bring stock sellers and stock buyers together. If you directly invest in the stock market, you require a broker.
- Market Makers: They are the institutions that are providing liquidity to the market and confirming the trade in stock is going in good order.
- Regulators: Regulators such as Securities and Exchange Board of India (SEBI) oversee the marketplace and ensuring all activities are reported and conducted ethically.
6. Diversified Investment in Stock Market
You can invest in diversified categories of investment in the stock market, including:
Equity Investments: In equity investment, you purchase shares of a company. It is a high-risk and high-return form of investment.
Debt Investments: If you prefer low-risk investments, you can invest in debt instruments like bonds.
Index Funds/ETFs: If you want your portfolio to be diversified without risking individual stocks, you can invest in index funds or ETFs (Exchange Traded Funds). These funds imitate stock market indices like Nifty 50 or Sensex.
Mutual Funds: With mutual funds, you invest in a pool of money where professional fund managers choose the stocks for you.
Real Estate Investment: Besides stock market, you can also invest in real estate, which is an off-beat investment but can give long-term growth.
7. Important Tips for Stock Market
While investing in stock market, there are some key tips that always have to be remembered:
Long-term Thinking: Rather than short-term fluctuations, you need to think long-term. If you give time to your investments, you can earn good returns.
Diversify Portfolio: Risk minimization is achieved by diversifying the investment. Different industries and sectors have to be invested in.
Research is Key: Research thoroughly before purchasing any stock. The books of the company, management, and industry trends have to be known.
Avoid Emotional Choices: Control your emotions during market volatility. Panic selling and greed-driven buying must be avoided.
Stay Informed: Keep track of stock market news and updates regularly. Economic events, company news, and market trends impact your choices.