Stock market guide for beginners

If you’ve been following our guide, it’s safe to assume you would now be aware of the workings of the stock market. But just knowing how it works isn’t enough to invest in the stock market. You need to be aware of multiple techniques, features, do’s and don’ts of the stock market as well. Here, we will delve deeper into the concept of stock markets and its workings. We will discuss what a stock is, how to make money from investing in stocks, how to invest in stocks and the Do's and Don'ts of share trading.

Key Points

• Stocks are primarily of two types: common and preferred.
• An issue of bonus or extra shares to the stockholders is referred to as bonus issue.
• Don’t wait for the perfect time to enter into the stock market, as there is no perfect time. Start as early as possible.

What is Stock?

When you buy stock of a company in the stock market, you become a part owner in the company and you have a certain level of claim over part of its assets and earnings.

Stocks are primarily of two types: common and preferred.

• Common stocks: When you own common stock of a company, you gain the right to vote at the shareholder’s meeting and to receive dividends.
• Preferred stocks: In case of preferred stocks you don’t have the voting right, but you will have a higher claim on assets and earnings than the common stocks.

Stocks are also referred to as “shares” or “equity."

How do I actually make money from investing in stocks?

When you trade in a stock market the prices of the stock changes, as the stock prices are dependent on the perceived value of the stock i.e. company. So when you see the stock price of a company rise, it indicates someone, or many investors, are placing buy orders for that stock. However, there are many market forces at play that impact the movement of a stock. This is just one of the ways in which you make money investing in stocks. The percentage increase in the stock price after you bought it will reflect the same percentage of increase in your capital invested and vice-versa.

What is bonus issue and dividend issue?

Another way in which you can make money through the stock market is when the company in which you bought stocks, issues bonus shares or dividends.

An issue of bonus shares to the stockholders is referred to as bonus issue. A bonus issue is usually based upon the number of shares that shareholders already own. A stock dividend is a dividend payment made in the form of additional shares rather than payment in cash.

How to invest in stocks

The steps you should follow before you invest in the stock market are:

• Get a PAN card: A PAN card is must for you for any financial transaction in India. PAN is required for opening a bank account, investing in the stock market and mutual funds, filing Income Tax returns etc.
• Get a broker: You are not allowed to go directly to a stock exchange and trade in the stock market. Get yourself a stock broker.
• Open a demat and a trading account: You are allowed to trade in the stock market only through demat and trading accounts. You must have an active demat and a trading account before you can invest in the Indian stock markets.
• Trading: Now you can start trading in the stock market by just being in contact with your broker and give buy and sell orders.

While these steps are essential before you start investing in the stock market, they aren’t enough in themselves. You’d do well to have proper knowledge of investing as well. Remember the do’s and don’ts of trading in the stock market.

Do's and Don'ts for share trading:

Do’s:

• Start by virtual stock market investing app on mobile or try out a stock investing desktop application before trying the stock market. These virtual apps are useful for practice before making an actual stock market investment.
• You should invest ample amount of time for doing research on the stock you want to buy. Buy shares when they are at a lower price and try to understand the stock pattern.
• Even if you have a small amount of money, start investing early as you can take good advantage of compounding from an early stage.
• Diversify your investment. Investing in various sectors lowers your chances of loss.
• Invest most of your money in the blue chip companies. They give you low returns but lowers your risk of loss.
• Keep yourself up to date with the latest news of the company you are invested in.

Don’ts:

• Don’t wait for the perfect time to enter into the stock market, as there is no perfect time. Start as early as possible.
• Don’t get carried away with the speculations, initial profits and buzz.
• The trading fees should be less than 2%. Otherwise, it can eat up your profit.
• Don’t invest more than your capacity and always set a budget for investing.
• Don’t be greedy, try to figure out the right time to sell your stock.
• Don’t get carried away and invest all your money in a particular stock. You may face a huge loss.

Wrapping Up

• You should strictly follow the do’s and don’ts, to invest efficiently in the stock market.
• After going through this article, you would have gotten a proper idea of the workings of the stock market.
• Try to start as early as possible. Read books, learn to invest, learn how to do proper research and then you are all ready to invest.