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On IPOs, Mutual Funds and the Stock Market
What is Investment: Meaning and Definition
An asset or object acquired to generate income or appreciation is an investment. When a person buys something as an investment, the goal is not to consume it but to utilise it to build wealth in the future. The term "appreciation" refers to an asset's value growing over time. Investment is usually the outflow of some capital today, effort, money, or an asset—with the expectation of a larger reward in the future than the initial investment. For instance, an investor could buy a monetary asset today with the expectation that it will generate money in the future or be sold at a better price later for a profit. The purpose of investing money is to generate income and increase the value of an asset over time. Any technique for earning future revenue might be referred to as an investment. This involves, for example, the buying of bonds, stocks, or real estate property. Buying a property that you can use to manufacture things may also be considered an investment. Any activity made in the hopes of increasing future revenue might be considered an investment in general. When it comes to pursuing extra education, for example, the objective is frequently to broaden one's knowledge and enhance one's abilities (in the hopes of ultimately producing more income). A certain amount of risk is always connected with investment since it is directed toward the possibility of future development or revenue. It's possible, for example, that you'll invest in a firm that goes bust or a venture that never gets off the ground. An investment may not provide any returns or may even depreciate over time. This is the main difference between saving and investing: saving is amassing funds for future use with no risk, whereas investing is the process of using the money for a possible future benefit with some risk. In investment, risk and return go hand in hand. If an investment option has minimal to no risk, the returns from that option will be very low. Higher returns usually entail more risk. Investment options such as debt instruments and debt mutual funds have lower risks than equities. So, stocks have the potential to deliver higher returns. But, it also needs to be noted that the downside for stocks is also high. Within the same asset class, risk and return expectations might differ dramatically. Although a blue-chip stock and a small-cap fall under equities, a blue-chip stock will have a different risk-return profile than a small-cap stock.
Types of Investment - Stocks, Mutual Funds & IPO
With various types of investment options and investing platforms available today, it becomes hard to decide where to invest money to generate the best possible returns. While each investment type has its features, the risk involved and ways to invest money, choosing a suitable one for you will depend on your:
- Risk tolerance,
- The amount available to invest,
- Age, income and
- Financial goals
Stocks are a highly-volatile investment option that has the potential to generate higher returns than others. Investing money in stocks is like buying or owning a share or part of a company. You can buy stocks of a company through the stock market, through brokers and online platforms.
Stocks as an investment option are preferred by individuals with a high-risk tolerance and who can invest for the long run.
- Mutual Funds
A mutual fund is an investment option that pools money from investors and invests the same across various investment options such as bonds, stocks, gold or a combination as per the scheme’s investment objective. Investors depend on the expertise of fund managers to create a portfolio of investments. The fund manager allocates money to various investment options according to the scheme’s objectives.
You can start investing money in mutual funds in two ways: Lumpsum and Systematic Investment Plan (SIP).
- IPO (Initial Public Offer)
When a private company decides to "go public", it comes with IPO. Initial Public Offering is the process of a private company issuing/selling its shares to the public for the first time. There are several reasons for companies to “go public”, generating fresh capital to operate their business being the most common one.
If you have performed extensive research about the risk involved in IPO, IPO as an investment option may be a great option to generate returns. Once the IPO period ends, the securities are freely available to trade in the stock/secondary market.
Key Features of Investment
It is good to know some of the features and factors of different investment options when you are investing. Here are some of the key investing features: Safety of initial investment Every investment is sensitive to price volatility owing to ever-changing market conditions. An investment instrument is appropriate if it protects investors' principal. Capital Gains Every investing instrument should provide capital growth. This is a significant factor in investment decisions. Every investment is anticipated to increase value over time. Investors can try to estimate future asset appreciation and buy them at the right moment. Return Expectation The investment yields varying returns depending on the market conditions. It is the amount that individuals expect to get in return after investing for a specific time. Liquidity Liquidity refers to how easily investors can buy and sell the different investment options. It is one of the critical factors of investment as most investors want to invest in a highly liquid investment option. Tax Efficiency Investors carefully consider the tax implications of investment income. Investors consider the tax burden on income while deciding on an investment opportunity. The actual return is the one left after taxes. The tax efficiency of an investment option is one of the attractive investing features.How Do You Calculate Return On Investment?
ROI, or return on investment, calculates returns on an investment made. It is done to calculate returns/profits against the cost of investment and gives you a clear insight into the performance of your assets. The formula to calculate return on investment manually is as follows:
ROI (return on investment) = Net return on investment / cost of investment X 100
Net return on investment: Final investment value - Initial investment value
Example: You bought 100 shares of an ABC company for Rs 1000 each. After one year, you sold the shares for Rs 1200 each. During the investing period, you earned Rs 5000 as a dividend.
The ROI will be calculated as:
100 X Rs 1000 X 100
Annualised ROI formula
When an investment is usually held for more than a year, annualised ROI formula is used. Annualised ROI = [(1+ROI) ^1/n −1]×100%
n=Number of invested years Annualised ROI is better because it considers the effects of compounding, which can be considerable over time. It is also beneficial when comparing returns or analysing investments. Alternatively, you can use an online ROI calculator to comprehend returns on your investment with no manual effort. This calculator generates results based on the input you feed. You need to fill in your information such as invested amount, maturity amount and the investment period. It can assist you in calculating annualised return on investment, compounded annual growth rate and total/ absolute return on investment. Things to keep in mind regarding the calculation of ROI:
- The results are usually presented in percentages(%).
- The final result can be either positive or negative. Negative results occur when costs exceed profits meaning the investments cost you more than returns.
- Based on the final results, you can distinguish between well-performing investments from the opposite ones.
How To Use an ROI Calculator?
- Enter the amount of your investment.
- Fill in the amount of money gained. It can also be called the maturity amount.
- Type your holding time of investment, be it one year, five years etc.
- Finally, the ROI Calculator will show your gains or profits on investments. It can be absolute gains on investment or annualised returns on your investment.
Investing in stocks or share market before gaining enough information about how it works is similar to leaving your home before deciding your destination.
Once you're done with self-evaluation, a question may arise “how to invest in the stock market”?
To begin investing in the share market, you need to have a Demat account and a Trading account. Demat account keeps a record of all your purchased shares electronically. A trading account will let you trade (buy and sell) shares online freely.
Documents necessary to activate your account are PAN card, Aadhar card, address proof, cancelled cheque, income proof, bank account details and passport-sized photographs.
There are two types of markets in the share market world: The Primary and the Secondary market.
Primary share market
The Primary market is all about companies offering IPO (Initial Public Offer). As mentioned earlier, when private companies decide to expand their operations or raise fresh capital, they issue equity shares to the public for the first time, known as IPO. Fixed Price Offerings (where companies decide prices and investors pay for them) and Book Building IPO (where bids are surveyed from buyers and prices are set between the floor price and cap price) are the two types of IPO. You can buy IPO shares online and offline. If you just wish to buy these shares, a Demat account would be enough, but you'll need a trading account to sell them in the secondary market. Though investing in IPO shares is beneficial and transparent, you should analyse the company well. Learn about its background, reviews, financial statements, and future growth scope.
Secondary Share Market
After an IPO period ends, the stocks of a company are available to trade freely in the secondary share market. Investors can buy and sell securities without any interference from companies.
The steps to invest in stocks through the secondary market are:
- Decide your goals: First, you should know where you want to invest, which company to choose and how long to invest.
- Activate your Demat and trading account: Demat and trading accounts are the following steps to invest in the share market. Prior to these, you must have a bank account to link it with your both accounts.
- Sign in: Now, you need to sign in to your Demat account through a mobile app or web.
- Select stocks: Choose a company’s stock you wish to invest your funds in. However, you need to ensure that you have sufficient funds to buy the shares.
- Specify price and units: Specify the price of shares you want to buy or purchase for the listed price. Select the number of units you wish to purchase.
- Wait for the seller’s response: Wait for the seller's response to reciprocate your request.
- Complete the transaction: Once your request gets accepted by the seller, the amount will be deducted from your bank account, and shares will be credited to your Demat account.
- Create an investment strategy
You can reduce your risk to face downfalls if you make a strategic plan before investing. If you decide where to invest, how much to invest and how long to invest beforehand, it prepares you to face market risks and volatility.
- Study the company’s profile carefully
Studying the company’s profile includes analysing the company's financials, such as the balance sheet and profit and loss statement. Go through the company's latest news and actions thoroughly. It will assist you in comprehending a clear picture of its revenue or potential to grow in future.
- Diversify your assets
One of the key rules in finance is not to put all your eggs in a single basket. You must have a diversified portfolio with investments made in various securities such as stocks, bonds, mutual funds etc. It is recommended as if one investment instrument does not perform well or gets into losses, and it gets compensated with gains from others. The point is to reduce risk and enjoy optimal returns.
- Your KYC / FATCA (Know Your Customer & FATCA Declaration) information must be filed with an asset management business, intermediary, or central KYC registration agency. Traditionally, a Demat and a trading account are created before investing in mutual funds. It is more convenient to easily keep and monitor all assets in one location and trade in investments.
- Find and choose a broker that can help you with mutual fund transactions.
- Your broker can help you open a Demat/trading account online.
- You can submit an application with a stockbroker or at the mutual fund's office if you want to work offline.
- Proof of your identity (Aadhaar ID, Voter ID, Driving licence etc)
- Proof of address
- A cancelled cheque
- PAN card
- The primary goal of your investment is to fulfil your financial goals.
- Your risk appetite must be considered while making investments.
- Create an investing plan and a diversified portfolio.
- Download the app on your mobile phone.
- Create your account by filling in all the necessary credentials.
- Analyse various schemes carefully, such as expense, reviews, rankings etc.
- Choose funds that align with your goals. Select your payment type: one-time lumpsum investment or SIP.
- Fill out your application form.
- Enter your bank account details and start investing.
- Go to the online portal or website of the fund house.
- Create your account by filling in your details and completing the entire registration process.
- Select your desired scheme and investment plan. Enter your details like investment type, mode of payment, bank details, and holding type(non-Demat or Demat).
- Verify your details twice, complete the transaction and start investing.
If you want to start an SIP investment, simply choose the scheme you want to invest in.
Next, include the amount you wish to invest monthly, the SIP tenure, the bank account information for automatic monthly fund withdrawals, and the SIP date.
The last step is to submit a standing declaration or simply register the fund house to your online banking as a trusted biller. Difference Between Investing and Trading Many people believe that these terms are the same or that trading is investing. However, these words have different meanings. While trading and investing both involve buying and selling assets to make a profit, they differ in a few aspects. What Is Investing? Investing is a process of allocating available resources to income-generating assets to grow wealth over time. It involves buying financial assets such as stocks, mutual funds, bonds and others. What Is Trading? Trading refers to buying and selling financial assets such as forex, stocks, etc., on a frequent basis. Traders usually aim to buy assets at low prices and sell them when they go up. The aim is to enjoy short-term gains. Investing Vs Trading Investment approach
Investing involves a fundamental analysis of the company by an investor. Fundamental analysis of a company includes reading financial statements such as balance sheet and P/L statement, checking growth rate, and keeping an eye on company news. Trading involves technical analysis of the company’s historical market information, including prices and volume of stocks. Traders usually predict future happenings based on the past performance of investments. Unlike fundamental analysis, which focuses on studying a company’s profile, technical analysis involves predicting price movements in the stock/financial markets through charts and graphs.
Investing is done for a longer duration of time. It may be done for years or even decades to let your money grow for years. While trading is done for shorter periods to get benefitted from even the slightest gains.
Investing is a long-term game and less risky than trading. It is like putting your money in assets and waiting for years to see the effect of compounding. However, trading is a short-term activity involving buying and selling investment instruments within shorter durations. Since trading involves higher risk and high market volatility, it has the potential to generate relatively higher returns.
How Upstox is the best website to invest in India?
Upstox is the best platform to invest in India as it is a trusted, safe and reliable online stockbroker. Trusted by millions of investors in India, Upstox has maintained a high benchmark in the Indian investment market. Through a single platform, you can invest in stocks, mutual funds and IPOs.
As an investor, you can be sure that your money is safe with Upstox. Here are a few more reasons to start investing money with Upstox.
Stocks: You can find the best stocks to buy through Upstox’s smart lists and smart filters. You can purchase and sell stocks with a single click and access critical business information. IPOs: Applications for initial public offerings are accepted 24 hours a day, seven days a week. You can apply and re-apply for IPOs via WhatsApp. There are no commissions for investing in IPOs. Mutual funds: Start investing in mutual funds through SIP at just Rs. 100 per month without any commission. Invest in tax saving mutual funds to reduce your taxable income. How to start investing through Upstox in India? You can start investing money in India through Upstox. Stocks, IPOs and mutual funds are the three available investment options.
Here are the steps that you need to follow to open your Upstox’s account:
- Enter your mobile number and email id and click next
- You will receive an OTP on your mobile number. Enter the four-digit OTP. Click on verify and sign in.
- Enter your PAN and date of birth
- In the next step, you need to tell about yourself, such as your gender, marital status, and income.
- You need to click on the checkbox to accept the above declaration
- Choose the segments that you wish to trade in and choose a leverage plan
- Fill in your bank details
- Upload your signature and income proof. You can also connect Upstox with DigiLocker and make the account opening process faster.
- Enter your Aadhaar number and click on next and enter the OTP. Click on ‘Allow’ to grant permission to Upstox to fetch your documents.
- Upload your Pan
- Take a live photo
- Share permission to use your device’s location
- Verify your email address by entering the OTP received on your email id.
- You need to have your mobile number linked to Aadhaar to continue.
- Choose the payment option to pay for the account opening process
- Click on ‘esign now’ and enter the security code
- You will see a form, click on the sign now and enter the OTP