A wise man once said “Learning how to invest in Stock Marketing is as simple as writing BINOD in the You Tube comment section.”

So In order to make you understand everything about Stock Market I am going to take you through a series of questions and answers covering all the basic aspects of it.

WHAT IS STOCK MARKET?

All companies need money to run their business. Sometimes the profit acquired from selling goods or services is not sufficient to meet the working capital requirements. And so, companies invite normal people like you and me to put some money in their company so that they can run it efficiently and in return investors get a share of whatever profit they make. Understanding this is the first step towards understanding stock market basics. 

WHAT ARE SHARES?

Shares are a way to own a part of the company’s value. In proportion to the capital you invest, you can get ownership rights to a certain percentage in the company.  Say you own 2% of the shares being traded in the market, you can say you have 2% ownership in the company.

Hence, shares are units of ownership in the company and its financial assets. Shares are also known as stocks, equity, scrips etc. After purchasing them you will be known as a stockholder or a shareholder of the company.

WHY DO COMPANIES NEED SHARES?

Why does a company need money from the market? As mentioned before, when a company is scaling up, expanding its business etc, it will need more capital. During such times, a company can tap into the share market and offer a certain number of shares based on its market value, which investors can buy.

Investors will be paying the company some money and in return get to be part owners. So when the value of shares rises, the value of shares investors own rises. Investors are however not lending money to the company so they are not creditors. These indeed share market basics for beginners because it is essential to understand why companies need shares at all.

HOW DO YOU MAKE MONEY?

Naturally, when you buy shares at a lower price and sell it at a higher price, you earn the capital gain. However there are two ways you can do this and if you are a beginner, it is especially important for you to know the difference between stock trading basics and stock investment basics.

There are two ways

Stock investors: Stock investors are those who keep their money in the stock for a longer period of time, sometimes even years. Returns are compounded over a period of time. Investors use fundamental analysis. They look at the growth trajectory of the company because your investment literally grows with the company in the long term.

Stock traders: Stock traders generally buy and sell within the same trading session. Traders use technical analysis to understand which stocks to invest in. Traders look for short and quick gains. Stock trading basics will require you to learn technical indicators like momentum oscillators, bollinger bands, charts and more.

MYTHS AND REALITIES OF STOCK MARKET

• The 1st myth is investments in the market are risky, but the truth is it’s the opposite. It is very good in the long run rather than in the short run.
• The 2nd myth is You need to have strong financial knowledge, but India has seen a bunch of Successful billionaire investors like Rakesh Jhunjhunuwala, Porinju Veliyath.
  Then I also came across terms like LTCG-Long term capital gain which means a person can hold a share for more than a year and the profit is known as LTCG, dividends(a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits) and interests. Companies like Google, Britannia gives dividends.
• The 3rd myth is you need to invest a lot of money in the stock market but in reality, u can invest with 100rs also (shocked! Aren’t you?).
• And the last myth i.e. the 4th one is that renowned companies can never give strong returns. Many investors believe that investing in small companies can give big interests later but it’s not always the same. Ex. Britannia

FINANCIAL ANALYSIS RELATED TO STOCK MARKET

• It is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability.
• It is divided into 3 main components-
• BALANCE SHEET-The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into three parts to include a company’s assets, liabilities, and shareholder’s equity. Assets are the things/commodities which we OWN. Liabilities are the things/commodities that we OWE. The balance sheet must balance with assets minus liabilities equaling shareholder’s equity.

• INCOME STATEMENT -The income statement breaks down the revenue a company earns against the expenses involved in its business to provide a bottom line, net income profit, or loss.
• CASH FLOW STATEMENT-It provides an overview of the company’s cash flows from operating activities, investing activities, and financing activities.

NOW LET’S TRADE

There are 3 main requirementsfor trading in stock market:

1. Trading Account: Trading account refers to a separate account managed by banks/broker that contains securities, cash or any holding. These accounts let the investors to buy or sell the assets within the same trading session. The investor needs to pay a very small amount for opening of a Trading account and an annual maintenance charge for the maintenance of the same.

• Demat Account: Dematerialization Account or Demat Account is a form of electronic Bookkeeping. In simple words, it is an account that holds the assets bought. All your holding shares are stored in a Demat Account. The introduction of dematerialization served to eliminate the paper-oriented process.

• Money (The most essential): To open a Trading or a Demat Account is no big deal but where to bring all the money to invest? A simple answer to which is given by a 11th standard economics book; Saving = Investment. We humans always have a tendency to save but do we save effectively is the question. People, like me and you, give priority to the expenditure and save the remaining part. But the most effective and efficient way to save is- set aside the savings first and then spend.

A simple rule to save could be 20/30/50. The rule says, Out of your total budget, set aside the first 20% share for Savings, another 30% for luxury and the rest 50% for the essentials. This is just one example of the allocations that could be made. You can allocate the percentages as per your budget but you must adhere to the rule you create.

Financial discipline is the first step towards the success.