ABCD of Stock Market

Priyanka Sharma

02 Sep 2017

Ramesh: Hi Suresh! I’ve heard you bought a new house and you are soon going to buy a car.Congratulations! Did you win a lottery? Or is itan ancestral fortune?

Suresh: Yes you’ve heard it right. I bought a new house, but I haven’t got any lottery, neither an ancestral fortune nor a new high paying job. But yes, I have got good returns out of my simple investments in the stock market.

Ramesh: Oh! I have never thought that stock market could yield such good returns. It always seems like a tedious process. Also, I have heard it is a very risky investment and people often end up losing money. May be it is not my cup of tea.

Suresh: I feel you have got the information about the stock market from very wrong sources. It is a risky investment I agree, but the risk could be minimized by proper analysis and people like me have really earned well out of it. Moreover, it is not at all difficult, there are just a few basic tips; once you understand them and start reading the latest updates you could soon be a pro.

Ramesh: Really! I’ve just been thinking about it in a wrong way since long. Will you help me in understanding these basics of the stock market? I would also like to invest in it.

Suresh: Yes sure! To start with, the stock market is a market place with buyers and sellers present in the form of a loose network of economic transactions, to deal in stocks (shares). These stocks represent the ownership claims on businesses. People often buy and sell them to generate earnings.

Ramesh: But how does buying or selling stocks generate earnings?

Suresh: The price of these stocks vary from time to time depending on the value of the company. This value depends on various economic factors. There are three methods in which one can generate earnings based on the convenience and risk capacity. The first method is by investing, in which we buy stocks of promising companies and keep them for long term and sell them years later after the value of stocks largely increases. The second method is by speculating- where we invest in the smaller price fluctuation of stocks and earn between the margins. Speculating is a short term process and is riskier. The third method is by trading, which is a very short term process. It yields lesser returns and has to be performed multiple times. It can last as short as a few hours. The risk quotient remains higher in trading.

Ramesh: Can you please elaborate on the pros and cons of the three methods?

Suresh: Yes, definitely. If you plan to invest then you have to analyse the company. Go by the fundamentals i.e. the performance of the stock. If you are more interested in quick but high margins, you can speculate by understanding the trend of a stock and sell it as soon as you see a close high. At the initial stages, speculating could be riskier. If you are interested in very quick small margins, you can trade by working on the immediate rise and fall of  prices, which is solely based on tips, analysis and instincts. Even the risk quotient for trading is high and you have to involve into many trades so as to generate a decent earning.

Ramesh: I have got the idea of the three modes to earn from stocks. But I still did not understand how to know the direction of the market. Could you please explain?

Suresh: Knowing the direction is based on the analysis which could be done using graphs in different time frames as per the requirement. Locate all the lows of a stock and see if the slope goes upwards. An upward slope indicates uptrend and a downward slope depicts downtrend. Similarly, if you see the slope going in a reverse direction it shows a trend reversal in the market.

Ramesh: Thank you! The information you have given has created a better understanding of the stock market in me. I would definitely do my homework and invest in stocks too.

Suresh: I am glad I could help. Happy Investing! 

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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ABCD of Stock Market

Priyanka Sharma

02 Sep 2017

Ramesh: Hi Suresh! I’ve heard you bought a new house and you are soon going to buy a car.Congratulations! Did you win a lottery? Or is itan ancestral fortune?

Suresh: Yes you’ve heard it right. I bought a new house, but I haven’t got any lottery, neither an ancestral fortune nor a new high paying job. But yes, I have got good returns out of my simple investments in the stock market.

Ramesh: Oh! I have never thought that stock market could yield such good returns. It always seems like a tedious process. Also, I have heard it is a very risky investment and people often end up losing money. May be it is not my cup of tea.

Suresh: I feel you have got the information about the stock market from very wrong sources. It is a risky investment I agree, but the risk could be minimized by proper analysis and people like me have really earned well out of it. Moreover, it is not at all difficult, there are just a few basic tips; once you understand them and start reading the latest updates you could soon be a pro.

Ramesh: Really! I’ve just been thinking about it in a wrong way since long. Will you help me in understanding these basics of the stock market? I would also like to invest in it.

Suresh: Yes sure! To start with, the stock market is a market place with buyers and sellers present in the form of a loose network of economic transactions, to deal in stocks (shares). These stocks represent the ownership claims on businesses. People often buy and sell them to generate earnings.

Ramesh: But how does buying or selling stocks generate earnings?

Suresh: The price of these stocks vary from time to time depending on the value of the company. This value depends on various economic factors. There are three methods in which one can generate earnings based on the convenience and risk capacity. The first method is by investing, in which we buy stocks of promising companies and keep them for long term and sell them years later after the value of stocks largely increases. The second method is by speculating- where we invest in the smaller price fluctuation of stocks and earn between the margins. Speculating is a short term process and is riskier. The third method is by trading, which is a very short term process. It yields lesser returns and has to be performed multiple times. It can last as short as a few hours. The risk quotient remains higher in trading.

Ramesh: Can you please elaborate on the pros and cons of the three methods?

Suresh: Yes, definitely. If you plan to invest then you have to analyse the company. Go by the fundamentals i.e. the performance of the stock. If you are more interested in quick but high margins, you can speculate by understanding the trend of a stock and sell it as soon as you see a close high. At the initial stages, speculating could be riskier. If you are interested in very quick small margins, you can trade by working on the immediate rise and fall of  prices, which is solely based on tips, analysis and instincts. Even the risk quotient for trading is high and you have to involve into many trades so as to generate a decent earning.

Ramesh: I have got the idea of the three modes to earn from stocks. But I still did not understand how to know the direction of the market. Could you please explain?

Suresh: Knowing the direction is based on the analysis which could be done using graphs in different time frames as per the requirement. Locate all the lows of a stock and see if the slope goes upwards. An upward slope indicates uptrend and a downward slope depicts downtrend. Similarly, if you see the slope going in a reverse direction it shows a trend reversal in the market.

Ramesh: Thank you! The information you have given has created a better understanding of the stock market in me. I would definitely do my homework and invest in stocks too.

Suresh: I am glad I could help. Happy Investing! 

Have Referral Code?