A Millennials Guide To The Basics Of Stock Markets & Ways To Invest In It

*I don¡¯t understand stock markets*

This is a very common reply of many who have no clue about stocks or even those who might have a little knowledge of stock markets. And let¡¯s be honest, for many, just the look of the numbers, charts and fluctuating figures is enough to scare them away from trying to even remotely gain an understanding of what it actually is.

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For those who have gathered the courage to understand the workings of the stock market here¡¯s an "explain like I¡¯m five" guide to something that scares the bejesus out of several mortals.

One of the most basic things you must remember about the stock market is that there are companies that issue 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 the prices of onions, tomatoes vary by the day, the same happens with stocks or equities, its value fluctuates on a daily basis.

What¡¯s the use of a share market?

To begin with, the share market is a source for companies to raise funds and for investors to buy part-ownership in growing businesses and grow their wealth. But how does that help you?

Let¡¯s say that in the future you have plans to buy a house or a car and you are looking to grow your wealth. The best way to start saving for it is to invest your money in the right places. Investing in share markets help you gain high returns.

While investing in a stock market, one can make money through dividends earned on stocks, mutual funds, real estate investment trusts and other income investments. While doing so, one has the benefit of earning capital gains when stocks they bought are sold at a profit. But there¡¯s a downside, if you¡¯ve invested in a company that¡¯s losing money, you can run the risk of stock values decreasing.

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What is a stock exchange?

A stock exchange facilitates stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on 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 National Stock Exchange.

Types of stocks

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 common shareholder or preferred shareholder on the basis of ownership. Both of these stocks represent ownership in a company but unlike the common stocks, the preferred shares normally come with a fixed dividend. As a preferred shareholder, you may not have voting rights. But you will get dividends before the common shareholder receives them. There is also something called 'convertible preferred stock'. This is basically a preferred stock with an option of converting into a fixed number of common shares.

How to invest in the stock market with little money?

Many people shrug away and think that investing in the stock market needs a lot of money to start. But in reality, you can start your investment with as little as Rs. 500/. The easiest way to get started is to open a trading account with an online brokerage. From there, you can begin investing by purchasing shares of stocks, mutual funds, exchange-traded funds and other investments. When purchasing individual stocks, investing in mutual funds, bonds or other investments, look at the current price, earnings per share, short- and long-term trading ranges, yield, and any rating cautions. Its always better to do your own research before investing and always be updated with share market news.

Buying and selling stocks

You can buy any number of shares you want, but most people buy in multiples of 100 shares. Traders and investors continue to buy and sell the stock of the company on the exchange, although the company itself no longer receives any money from this type of trading. You can buy stocks from any online discount broker, from a bank with a brokerage division, or from any other legitimate brick & mortar or online brokerage firm.

Risk reward and safeguard

You are bound to be emotional and overwhelmed when you first start investing in the stock market as earning good returns may make you happy but losing money can be painful. If the risk of a drop in prices makes you anxious all 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 transferring money from the impatient to the patient.¡± The general direction that the stock market takes can affect the value of a stock are:

A. Bull market

Stock prices are rising and investor confidence is growing. It¡¯s often tied to economic recovery or an economic boom, as well as investor optimism.

B. Bear market

A beak market where stock prices are falling and investor confidence is fading. It often happens when an economy is in recession and unemployment is high, with rising prices.

Any stock is still only as good as the company that issues the stock. It is always prone to outside forces like competition, industry shifts, regulations and natural disasters, just like the current coronavirus crisis. So, don¡¯t get your hopes too high while investing in stocks, brace yourself 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.