*I don¡¯t understand stock markets*
This is a very common reply of many who have no clue about stocks or even those who mighthave a little knowledge of stock markets. And let¡¯s be honest, for many, just thelook of the numbers, charts and fluctuating figures is enough to scare them awayfrom trying to even remotely gain an understanding of what it actually is.
For those who have gathered the courage to understand theworkings of the stock market here¡¯s an "explain like I¡¯m five" guide tosomething that scares the bejesus out of several mortals.
One of the most basic thingsyou must remember about the stock market is that there are companies thatissue shares of stock to help provide financing for their existence and growth.When you own shares of stock, you own some per cent of the company. And as for shares value, just the way you¡¯d shop at a vegetable market where theprices of onions, tomatoes vary by the day, the same happens with stocks orequities, its value fluctuates on a daily basis.
To begin with, the share market is a source for companies toraise funds and for investors to buy part-ownership in growing businesses andgrow their wealth. But how does that help you?
Let¡¯s say that in the future you have plans to buy a houseor a car and you are looking to grow your wealth. The best way to start savingfor it is to invest your money in the right places. Investing in share marketshelp you gain high returns.
While investing in a stock market, one can make money throughdividends earned on stocks, mutual funds, real estate investment trusts andother income investments. While doing so, one has the benefit of earningcapital gains when stocks they bought are sold at a profit. Butthere¡¯s a downside, if you¡¯ve invested in a company that¡¯s losing money,? you can run the risk of stock values decreasing.
A stock exchange facilitates stock brokers to trade companystocks and other securities. A stock may be bought or sold only if it is listedon an exchange. Thus, it is the meeting place of the stock buyers and sellers.India's premier stock exchanges are the Bombay Stock Exchange and the NationalStock Exchange.
There are two main types of stocks that investors can own:common stock and preferred stock. When you buy a share, you can be a commonshareholder or preferred shareholder on the basis of ownership. Both of thesestocks represent ownership in a company but unlike the common stocks, the preferredshares normally come with a fixed dividend. As a preferred shareholder, you maynot have voting rights. But you will get dividends before the common shareholderreceives them. There is also something called 'convertible preferred stock'. Thisis basically a preferred stock with an option of converting into a fixed numberof common shares.
Many people shrug away and think that investing in the stockmarket needs a lot of money to start. But in reality, you can start your investmentwith as little as Rs. 500/. The easiest way to get started is to open a tradingaccount with an online brokerage. From there, you can begin investing bypurchasing shares of stocks, mutual funds, exchange-traded funds and otherinvestments. When purchasing individual stocks, investing in mutual funds, bondsor other investments, look at the current price, earnings pershare, short- and long-term trading ranges, yield, and any rating cautions. Itsalways better to do your own research before investing and always be updatedwith share market news.
You can buy any number of shares you want, but most peoplebuy in multiples of 100 shares. Traders and investors continue to buy and sellthe stock of the company on the exchange, although the company itself no longerreceives any money from this type of trading. You can buy stocks from anyonline discount broker, from a bank with a brokerage division, or from anyother legitimate brick & mortar or online brokerage firm.
You are bound to be emotional and overwhelmed when you firststart investing in the stock market as earning good returns may make you happy butlosing money can be painful. If the risk of a drop in prices makes you anxiousall the time, then stock market investing is not going to be your cup of tea.According to Warren Buffett, ¡°the stock market is a device for transferringmoney from the impatient to the patient.¡± The general direction that the stockmarket takes can affect the value of a stock are:
A. Bull market?
Stock prices are rising andinvestor confidence is growing. It¡¯s often tied to economic recovery or aneconomic boom, as well as investor optimism.
B. Bear market??
A beak market where stock prices are falling and investor confidence isfading. It often happens when an economy is in recession and unemployment ishigh, with rising prices.
Any stock is still only as good as the company that issuesthe stock. It is always prone to outside forces like competition, industryshifts, regulations and natural disasters, just like the current coronaviruscrisis. So, don¡¯t get your hopes too high while investing in stocks, braceyourself for both the good and the bad.
It takes years to become well versed in reading financial markets and managing stocks in general.You may want to find someone you trust and seek their guidance.