Stock markets often come up in conversations and investing in them seems like entering a risky territory. But that shouldn’t be the case.
Here are 5 of the most commonly asked questions about the stock markets and how you can you start trading:
#1. What is the Stock Market?
Stock Market is a place where buying and selling of financial instruments like shares, and bonds take place. A share means ownership rights to a part of a company.
#2. How to start investing/ trading in the stock market?
- Step 1: Select a registered Stock Broker.
- Step 2: Open a trading a/c (to place buy/ sell orders) and a demat a/c (to hold shares in electronic form instead of physical form) with the stockbroker.
- Step 3: Research thoroughly on companies you wish to invest in.
- Step 4: Once you’re confident, start trading.
Note: A banking a/c is also needed to transfer money to and from your trading a/c. This banking a/c could be your regular savings or current a/c linked to your trading a/c.
#3. When is the right time to enter the stock market?
We have all heard people saying the right time to enter the stock markets is when it is declining, because everyone wants to buy at a low price and sell at a high price. But there is no particular ‘best time’ to enter the market. If you find a great price to buy a stock and anticipate its growth in the future you must go for it.
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.– Warren Buffett
#4. How to trade wisely?
- Don’t put all your eggs in one basket: In order to be a successful investor, you need to know that buying a single stock or individual stock is risky. You must build a portfolio of diversified stocks in order to minimize your risk. The logic is pretty simple, if one stock performs badly, another one in the portfolio will make up for the loss.
- Diversify in terms of sectors: Invest in shares of more than one sector at the same time. There should be 12-15 stocks in your portfolio belonging to 5-6 sectors. And not more than 10% should be allocated to more than one stock. Banking & finance, infra-road, chemicals, and defense are top sectors to invest in for the long term. Read this interesting article by financial express to know more in detail about them.
- Do not follow the herd: You should not blindly invest in companies that everyone is investing in. A while back the famous dot com bubble occurred. Many people started investing in internet based companies without actually doing any research on those companies. Just because a few of them became successful, people thought investing in any internet based company would make them profits. This simply tells us that you must conduct thorough research on the companies you want to invest in.
#5. What are the different types of stocks?
Blue-Chip Stocks: If you are looking for safe investments with low risks you can invest in Blue-chip Stocks. These are stocks of well-established companies with stable earnings. These companies have lower liabilities and that’s why they can give regular dividends.
Risk Level: Safe and stable.
Examples: Tata Consultancy Services (TCS), Reliance Industries, Infosys are all blue chip stocks.
Pro Tip: Blue Chip stocks though safe may not be the best investment option because these are expensive and even though returns are stable they are less compared to other stocks.
Income Stocks: If you are in need of regular income you can invest in Income Stocks. Income stocks usually represent stable companies that distribute consistent dividends so they are suitable for those looking for a secondary income source. Their stock price doesn’t rise much because they are not high growth companies.
Risk Level: Relatively Low Risk
Example: Coal India, Clarient Chem, Mandhana Ind are a few top income stocks in India.
Growth Stocks: If you are looking to invest in companies that will benefit you in the long run then you can invest in Growth Stocks. These stocks do not pay high dividends because they reinvest their earnings for company operations. The companies show higher share prices because of their growth rate. This helps the investor earn a higher return when the stock is sold (although this comes at the expense of lower income through dividends).
Risk Level: Moderately Risky
E.g. Piramal Enterprises, Bajaj Finance are stocks that have shown good growth rate in 2017.
Now that you know understand the basics of Stock Market, take a step further and research on a few companies and tell us which ones work for you.