Fundamentals for Investing in the stock market as a beginner

Fundamentals for Investing in the stock market as a beginner

Investing in the stock market is the talk of the town today. While some people make huge profits by investing their savings, some lose all their money. , the people who incur huge losses are those who invest without complete knowledge. So, as a beginner, let’s dive in and see the fundamentals of investing in the stock market.

What is a Stock Market?

Stock shares, debentures, and other financial instruments exchange hands in markets where buyers and sellers exchange the instruments for money. Here, the sellers are the current owners of the instrument, and buyers are the people seeking to buy that instrument.

Unlike many other countries, India has two essential stock exchanges, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Requirements for Trading Stock Market

Any adult age 18 years or above can start investing in the stock market if they have the following:

Bank Account: An investor must have an active bank account to carry out the transactions.

Demat Account: An account opened by an investor who holds their shares in a dematerialized form, i.e., an electronic form.

Trading Account: The investor opens this account with a stockbroker. It allows you to trade securities in the stock market.

Choosing investment goal: Short-term investing or Long-term Investing

Choosing whether you want to invest in the stock market for the long term or the short term is the first step.

When you invest for the short term, you buy a security and hold on to it for a few days or months to sell it as soon as the price increases and make a quick profit.

A long-term investment is when you get security and hold it for a few years to generate a profit/capital gain.

Both goals have pros and cons, so investors must choose one goal based on what they want and how much risk they are willing to take.

Choosing the nature of security: Equity or Debt

After choosing an investment goal, the primary investment strategy is to choose the nature of security they wish to invest in. There are two types of securities:

Equity: includes shares that one can invest for capital gains and profits. Equity shareholders of a company have a right to dividends and voting rights in the company. As the company grows, the value of its equity shares also rises, providing the investor with a chance to make huge profits.

Debt: Debt instruments include debentures, bonds, etc. It is an excellent option for investors who want a regular income. Companies pay interest on these securities. But, the investor won’t be able to make huge profits/ capital gains.

Choosing the nature of the company to invest in: Small vs. Mid vs. Large Cap Companies

A company’s market capitalization or market cap is one of the main factors that an investor considers while investing in stocks.

Small cap: Companies with a market cap of less than Rs. 5000 crores come under this category, and while they have high risk, their returns tend to be higher, too, if the company does well.

Mid Cap: Companies with a market cap between 5000 and 20000 crores fall under this category. These are well-doing companies that tend to have a moderate risk with a decent return.

Large Cap: Companies with a market cap above 20000 crores fall under this category. These are big market dominators of the industry, generally providing a good return with low risk.

Portfolio Diversification and conducting Fundamental and Technical Analysis

Do fundamental and technical analysis once you know your investment goals, the type of asset you want to buy, and the company you want to buy it from. They should compare the company’s financial statements and charts to figure out how it did in the past. After choosing good companies to invest in, a good rule of thumb is to put together a basket of different stocks to lower risk.

A portfolio diversification strategy allows for this purpose.

Conclusion

To make money on the stock market, you need to know how much risk you are willing to take and your investment goals. Also, you need to determine what kind of investment and company you want to make. So, they now have to do both fundamental and technical analysis and invest in a wide range of stocks. But, even after following these steps, some risk persists, which one must be ready to take to enjoy the returns.

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