Stock Market Basics
The ABC of Stock Market
Before starting my investment journey, I wasn’t sure what was right for me, so I explored my options by testing the waters initially. I divided my funds into tranches and invested in different options. Over the time, I got to know what suited me and what was working for me. Based on that experience, I am sharing my understanding for stock market, which I feel beginners should be knowing. So lets get started…
Understanding how the stock market and investing work is important for securing your financial future. From knowing who’s involved in the market to learning about basic concepts like making your money grow over time, it’s all about having a good grasp of the basics. In this guide, I’ll cover everything you need to know, whether you’re just starting out or you’re already familiar with investing. I’ll break down key ideas and give you practical tips to help you make smart decisions about saving, investing, and getting involved in the stock market.
- Saving, Investing and Compounding
- Investment Options
- Stock Market Participants
- Initial Public Offerings (IPOs)
- Trading and Investing In Stock Market
1. Saving, Investing and Compounding
Saving money is crucial for a secure financial future. Instead of spending all your earnings, setting aside a portion regularly is essential. Even if you have a modest income, consistently saving money can build up a substantial amount over time. However, merely saving money isn’t enough, considering the impact of inflation.
Once you’ve established a habit of saving, it’s time to consider investing. Investing your savings allows you to make your money work for you. By putting your money into assets like stocks, bonds, or real estate, you have the potential to earn returns on your investment. This is important for long-term growth and stability in your financial journey.
Now, let’s talk about the importance of compounding. Compounding is a powerful force that allows your investments to grow exponentially over time. When you earn returns on your investments, those returns are reinvested, generating even more returns. This cycle repeats, leading to a snowball effect where your wealth grows at an increasing rate. Understanding and harnessing the power of compounding is key to building significant wealth over the years.
2. Investment Options
There are various asset classes with different risk and return profiles:
- Fixed Income: Safe but lower returns (around 5%) i.e. FDs, NSCs etc.
- Equity: Higher risk but potentially higher returns (around 14%) i.e. Delivery and F&O.
- Real Estate: Returns through rental income and capital appreciation (9% + 2–3%).
- Commodities (Gold, Silver etc) : Moderate returns (around 9%).
Among the different asset classes, equities have historically provided the highest returns, making them a preferred investment choice for long-term growth.
Successful investing requires learning about different assets and having the patience to stay invested for the long term. By understanding these principles, you can navigate the stock market more effectively.
3. Stock Market Participants
The stock market is where people buy and sell equities. It operates electronically and can be accessed through a stockbroker like Zerodha or 5Paisa etc.
In the stock market, there are many different participants, including promoters, Foreign Institutional Investors (FIIs), Domestic Institutional Investors (DIIs), and retail investors. Each of these participants plays a role in the market.
Every entity in the stock market must be regulated and can only operate within the rules set by the regulator. In India, the Securities and Exchange Board of India (SEBI) is the regulator of the securities market. SEBI sets the legal framework and regulates all entities that want to operate in the market.
4. Initial Public Offerings (IPOs)
Before we delve into why companies decide to go public, it’s essential to understand how a business starts. At the early stage before a business generates revenue, those who invest in it are called angel investors. These investors take on a lot of risk, similar to the company’s founder. The money they provide to kickstart the business is known as seed funding, and typically, they invest a relatively small amount.
A company’s valuation indicates its worth, considering factors like its assets, debts, and future growth potential. The face value, on the other hand, represents the original worth of one share. It’s a basic measure of a share’s value. Money spent by a company to grow its operations is called capital expenditure or CAPEX.
As a company grows, it seeks funding through different rounds like Series A, B, and C. Generally, the newer the round, the higher the company’s valuation. When companies reach a certain size, venture capitalists (VCs) may not invest further. In such cases, companies turn to private equity (PE) firms. PE firms invest larger amounts of money, usually when a company is more established. They have a lower risk appetite compared to VCs or angel investors and often place their representatives on the company’s board to guide its direction.
A company’s valuation grows as its business, revenues, and profits increase. An Initial Public Offering (IPO) is a way for a company to raise funds from the general public. Funds raised through an IPO can be used for various purposes, including expanding the business, restructuring debt, or rewarding shareholders.
5. Trading and Investing in Stock Market
A stock market is where a trader or investor can buy and sell shares. It is a place where buyers and sellers meet electronically to transact. The stock exchange facilitates these transactions electronically.
Different opinions make a market, as buyers and sellers have various perspectives on stock values. News and events can move stock prices daily, and demand-supply mismatches also cause price fluctuations.
When you own a stock, you receive corporate privileges such as bonuses, dividends, and rights. The holding period is the time during which you hold your shares.
For measuring returns, you use absolute returns when the holding period is one year or less. For identifying growth rates over multiple years, you can use the compound annual growth rate (CAGR).
Traders and investors have different approaches to the stock market. Investors aim to grow their wealth by staying with a business for a long time. They believe in the company’s growth potential and are willing to wait for it. On the other hand, traders want to make quick profits. They buy stocks when the price is low and sell them when it’s high, usually within a short time. Traders take more risks and hold stocks for shorter periods, while investors prefer lower risks and hold stocks for longer.
In conclusion, knowing the basics of the stock market and investing is important for a secure financial future. The stock market lets traders and investors buy and sell shares online, with the stock exchange making these transactions possible. Different players, like angel investors, venture capitalists, and private equity firms, help fund businesses at various stages.
By going public through an IPO, a company becomes listed on the stock market, allowing retail investors to buy and sell its shares. Successful investing takes patience, learning, and a long-term view. By diversifying investments, understanding market changes, and managing risks, investors can handle the market’s ups and downs and reach their financial goals.
If you loved this story, please feel free to check my other articles on this topic here: https://ankit-rathi.github.io/tradevesting/
Ankit Rathi is a data techie and weekend tradevestor. His interest lies primarily in building end-to-end data applications/products and making money in stock market using Tradevesting methodology.
