What are Stocks?
Stocks are shares or ownership in a business. When you invest in stocks, you basically buy a part of a company and become a shareholder in that business. The basic idea is that you give your money to a company to run its business operations and if the business makes profits, you also get a share of that profit. Stocks are also known as ‘share’ or ‘equity’.
How do you Actually Make Money from Stocks?
Well, how does equity investment work? Suppose you buy 10 shares of a company called ‘ABC Limited’ at Rs. 1000/share. So, your total investment in the company is 10,000. With time, if the company runs its business well and its profits go up, the valuation of the company also goes up and the price of your shares also goes up in the market. Then you can sell your shares to make a profit. Suppose ABC Ltd is now trading at 1400/share. So, you sell your 10 shares and get 14,000. Thus you make a profit of 4,000 (40% return on your actual investment).
So, people generally make profit from share price appreciation. Moreover, most good companies periodically distribute some of their profits among the shareholders, and that is called dividend. Dividends are directly credited to your bank accounts.
Is Stock Investment Safe?
The stock markets in India are regulated by SEBI. There are myths among uninformed people that stocks are gambling. But the truth is that equity investments are no gamble, no scam or no chit fund. It is completely legal and safe from that perspective.
But yes, as opposed to debt or fixed return securities, stock or equity does not offer a fixed return. It doesn’t even guarantee any return. We need to think our equity investments like our own businesses. If the businesses do well, we will make profit. The more the business grows, the more profits we make. On the other hand, if the business makes losses, our investment value might go down and we may have to take losses too.
Moreover, public company’s shares are actively traded in the stock markets, so there are real-time price volatility and certain kind of market risks attached to it.
Why Should One Invest in Stocks?
Historically, equity has given higher returns over the longer period than most other popular asset classes like fixed deposits, provident funds, bonds, real estate or gold. Stock investment is gaining popularity in India because of its high return potential. So, it is a high-risk high-return kind of investment which generally rewards investors if they hold their investments for long tern horizons like 10-15 years.
One more good thing about stock is that it is a highly liquid asset. That means you can sell your stocks any time if and when you need money.
Who Should Invest in the Stock Market?
Equity investment is generally advised for moderate to high-risk taking investors and for young adults whose financial goals are at least 8-10 years away. In short, anyone can invest in the stock market if s/he has a long term investment goal.
It is generally advised not to put all your money in stocks, not to use borrowed funds for investment and not to invest all the money in one single stock. You should start with a small amount and create a diversified portfolio of 10-15 good companies and invest in them only the amount that you can leave invested for at least 5-10 years.
How Much Return Should One Expect from Equities?
The stock market returns are generally linked to the country’s economy. Ideally, an average well-run company’s profit growth = Country’s annual GDP growth rate + Inflation rate.
In India, the GDP growth rate is expected to remain in the range of 7-8 percent and the inflation rate is expected to remain at 5-6% in the upcoming years. So, the growth of an average company should be at 12-14%. So, that should be the realistic return expectations from equities in India in the long term.
Now, there will be some businesses which can beat the market and bring faster growth than the overall economy. Those companies might give annualised returns like 20%, 30% or even 40%. But, it’s not very easy to consistently find such good companies, invest in them at the right time and stay invested for a long period of time. High returns often come with high risks too.
How to Find Good Companies to Invest?
Initially, you should start investment with good FMCG companies whose products you use and know for a long time. It is because you must understand a company’s business before investing in it. There are companies whose business operations, products and services are quite complex and difficult to understand. It is always advised to avoid those companies if you don’t understand their business.
You may use websites like Screener.in to check the company’s financials and other information. The very basic things you need to check are –
- last 5 and 10 year sales growth – should be 10% or more
- last 5 and 10 year profit growth – should be 12% or more
- ROE (Return on equity) – should be 12% or more
- Debt to Equity ratio (loan burden on company) – should be less than 1
- You must understand the business – visit the company’s website and know about its products and services
- Think about future prospects of the business – Do you think the company’s products and services are good and will remain in high demand in future too?
- The company and its management should be trustworthy – Do a Google search for “company name + scam”, “company name + fraud” etc. to know if the management is good and dependable.
Those fundamental checks and researches should work as a starting point for your investments in equities. With time, you will learn and understand more about businesses and your skill to find better companies would grow accordingly.
So, How to Invest in Stocks?
Well, now we have come to the final stage of this article on stock market investing for beginners. Investing in equity earlier was not that easy when it was all offline. People had to visit the stock exchanges or telephone their stock-brokers to buy and sell a company’s shares.
But now, everything has been online. You can just install an app like Groww, Zerodha, Upstox or Paytm Money and complete your KYC at the comfort of your home. You just need a PAN card and your mobile number should be linked to your Aadhaar card. Once you complete your KYC process online, they will activate your trading and demat accounts after some checks.
A trading account is used for buying and selling stocks from the market (stock exchanges). And, a demat account is needed to hold your shares (just like a bank account holds your money).
Once your trading account is activated, you can transfer money from your bank account to your trading account and then you can buy your favourite stocks.
What’s the minimum requirement? Well, there’s no minimum amount required for investing in stocks. You can start by adding as low as Rs. 100 to your trading account.
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Hopefully, this article solves some of the major puzzles in your mind about investing in stocks. But yes, there should be many more queries left because the stock market and investing in general are such vast fields. So, questions never end. We have got you covered though. Just ask your question to us and we are here to help.