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Investments are crucial for building wealth. Traditional financial instruments that can’t be adjusted for inflation don’t always let you optimize the value of your investment. Stock markets provide you this opportunity.
Before investing in stocks , you must understand how the stock market works. Today, we will be going over the fundamentals of stock trading. We will also decode some terms you must have come across, like shares, stock market and dividends. And also see how you can start investing.
Let’s begin with the terms stocks and shares. What are stocks and are they the same as shares?
A stock or an equity is essentially a fraction of the company’s ownership. If you own a stock, you are entitled to a portion of the company’s assets and profits. This is according to the amount of stocks you own. A single unit of stock is called a share. Stocks are usually traded in the stock market, also known as a stock exchange.
So let’s find out how it works.
National Stock Exchange (NSE) aur Bombay Stock Exchange (BSE) are the only two stock exchanges in India.
Companies listed in exchanges offer up a part of the ownership of the company to the general public, in the form of shares. The capital raised form these shares can be used by the company to fulfil business goals. A stock market is also called a secondary market.
The primary market is the IPO market. On it, companies list their stocks on the exchange for the first time. Once listed, stocks can be bought and sold by traders.
There are some ways to earn from stocks. The returns can be in the form of dividends. Companies can distribute a portion of their surplus amongst their shareholders. These payouts are called dividens. Another way to earn is by using trading strategies to make profitable purchases or sales of shares. Trading strategies are supplemented by fundamental analysis and technical analysis. In fundamental analysis the intrinsic value of an asset is assessed. Whereas technical analysis uses technical indicators to make predictions based on historical statistics. These indicators include Candlestick charts and patterns, RSI, simple moving averages or SMA etc and many more. Let’s see an example at play.
Kiran knew that a popular hospitality company was planning an expansion. She bought the shares of the company much before they announced the opening of their new locations. After that announcement, the value of shares shot up. Kiran held on to her shares and continuously monitored the price action. She noticed a pattern in the candlestick chart that indicated that the price may start crashing. Kiran then sold ehr shares and gained from the price difference.
Buying an asset at a low price in the hopes of the price increasing in the future, is known as a long position. And the pattern that Kiran noticed was the evening star pattern. This was an example of using strategies in stock trading.
To hold stocks, you need a demat account with a registered stockbroker. You cannot directly trade on stock markets. Brokers and brokerage firms do the trading in the market on your behalf. And for this they charge nominal fees. You also require a trading account to trade on stock markets.
Let’s say you wish to purchase 10 shares of company ABC. You will place an order through your trading account for 10 shares. The cost of the shares will be deducted directly from your bank account. The broker will purchase the shares for you and they will reflect in your Demat account.
All brokerages have to register with a Depository. In India, NSDL that is National Securities Depository Limited aur CDSL that is Central Depository Services Limited are the only 2 depositories registered with SEBI. SEBI or the Securities Exchange Board of India is the sole regulator of the securities and commodities in India.
Now, making a demat account is very easy. However, you need to have done thorough research before investing in the market, starting with the fundamentals of stocks. There are risks associated with trading in the stock market. For example, if the value of a stock you hold crashes, you may lose money. Which is why it is important to include a variety of assets in your investment portfolio, so that when one of them goes down, your other investments are still safe. This is known as diversification. Depending on your risk appetite and long-term goals you may invest in a combination of saving instruments and equities.
To find out more about the stock market and trading strategies, visit www.angelone.in and find simple, fun and educational resources!
