Learn and Earn
Advice for novice investors on investing
An increasing number of people are investing in stocks as a result of the pandemic. Professional investors and content creators have been discussing investing opportunities for regular people on Reddit and TikTok, and these platforms have been hotbeds of stock content lately. Speaking with seasoned investors, they can tell the difference between amateur and professional investors. Any novice investor should have a fundamental understanding of the many financial product categories, which include stocks, bonds, certificates, deposits, and mutual funds.
Investment Advice:
• Firstly, it is important for investors to understand that no investment is guaranteed to be successful. Any business can conceal its issues from potential investors. Natural disasters, changes in regulation, or advancements in technology can impact even the most financially stable corporation with top-notch management. In order to lower risk and increase returns on individual stock investments, it's critical to develop the ability to identify businesses that, despite their lack of glitz, deliver long-term success.
• Keep in mind that if the stocks you want to purchase are still cheap or have solid fundamentals, this could be a sign of short-term investment concern. We must first ascertain the cause of the organization's performance. It is crucial to understand the cause of the price decline, even if it is only short-term market rumours or anxiety. In this instance, always buy as though the stocks are on sale and take advantage of reduced prices. It's also important to remember that the stock market is cyclical. Therefore, just because some people in the market panic and start selling, it doesn't guarantee that other people would follow suit.
• Why It need to be evident that utilising a portfolio manager or broker does not guarantee high yields and returns. Since these individuals are simply human, occasionally they might put their own rewards and bonuses ahead of those of their clients—and that's on top of the advisory costs that will eventually reduce your earnings. Finding a broker who consistently outperforms the market is also quite difficult. In certain cases, the broker and investor may even disagree over a company portfolio, even if it may appear correct to you.
• Make sure your portfolio is always diversified by investing in a variety of asset types, such as energy, metals, bonds, mutual funds, money market funds, or exchange-traded funds (ETFs).
• Amateur investors can use the 120 rule of investing to determine what proportion of their overall funds they should allocate between stocks and bonds. It goes like this: - The amount you should invest in stocks is the result of deducting your age from 120; the remaining amount should be placed in bonds.
• Lastly, remember that every person is unique and has a unique background and perspective. As a result, our investment style will also differ greatly. For instance, a risk-averse investor.
The Stock Market: What Is It?
A stock market is an exchange where buyers and sellers meet to exchange equity shares of companies that are publicly traded. Aside from this, a lot of newly established businesses issue shares of publicly traded firms. These transactions are made through OTC market venues or formalised, institutionalised exchanges. OTC refers to over-the-counter sales channels.
By bringing together buyers and sellers of shares to transact, the stock market guarantees transparent transactions and reasonable pricing procedures.
Most transactions were conducted on paper in the past. Nonetheless, electronic transactions are now feasible due to digitization.
How is the stock market operated?
The idea behind how the stock market operates is very straightforward. Vendors in the stock market include both individual and institutional investors who purchase and sell a range of products that are listed on the stock exchange. Investment banks, hedge funds, and pension plans are a few examples of these institutional investors. Either OTC markets or stock exchanges are used for the trading of stocks. For businesses looking to raise money in each of these marketplaces and make advantage of their services, there are various listing requirements.
When buyers and sellers arrive at the market to trade for any company's stock, the stock price fluctuates. Demand and supply for the firm's stock, developments made by the company, earnings and growth expectations, elections, changes in the economy, the budget, national policies, and many other factors all affect the price of the stock.
On the stock market, how are prices set?
The supply and demand of stocks affect the prices of equities on the market. The lowest price at which someone is willing to sell that specific stock is the highest price that they are willing to pay. We refer to this as the bid and ask prices. The price at which a market participant or dealer is willing to purchase a stock is known as the bid price. The asking price is the amount the seller is ready to take for the stock.
When a specific stock is in high demand, buyers typically outnumber sellers who are eager to liquidate their holdings. The stock price increases as a result. Conversely, the price of the stock would decrease if more sellers were in the market liquidating their holdings.
It's critical to recognise that market makers are essential to the buying and selling of shares because they guarantee that there are always buyers and sellers.
Market makers purchase and retain shares while continuously posting buy and sell quotes for those shares. The spread is the gap between the highest price—the bid price—and lowest selling price—the ask price—that the buyer is willing to offer.
The stock market's golden rules
The majority of individuals think that having a portfolio of well-performing equities is necessary for success in the stock market. It is, yet, far more than that. There are some fundamental guidelines for investing in the share market, even though stocks provide the thrill of capital growth. These are the following:
1. Steer clear of herd mentality
2. Make a thoughtful choice
3. Make an understanding-based investment
4. Avoid attempting to timing the market.
5. Adopt a methodical strategy
6. Master emotional self-control
7. Spread out your holdings
8. Set reasonable goals
9. Use only the extra money to invest
10. Carefully monitor your portfolio
The stock market's myths
Undoubtedly, stock market investment has the potential to compound investors’ wealth in the long run. However, many avoid it because of certain myths related to the stock market. This section will look at a few myths that can prevent investors from venturing into markets and result in a lost opportunity.
• Stock market investing is like gambling.
• The stock market is for those who are experts in this field.
• Investing a lot of money in the stock market can help make huge money.
• All high risk in the market yields a high return.
• You need a broker to invest in the stock market.
• Rising price of the stock will come down.
• The stock market always results in losses.
An investment is what?
An asset or thing purchased with the intention of earning income or appreciating in value is called an investment. Making an investment entails contributing money in order to raise its value over time. Generally speaking, an investment good is bought to generate wealth rather than for personal use. It might be a company, bond, stock, or piece of real estate.
Stock market investment types:
Generally speaking, there are two types of investments: fixed-income and growth-oriented.
A fixed-income investment strives to maintain the initial value of the investment while offering a consistent stream of income that can be reinvested or given to the investor. Growth-oriented investments aim to increase the value of capital over time.
Among the investments falling under these two categories are:
• Exchange-traded funds
• Stocks
• Bonds
• Fixed-term investments
• Making plans for retirement
• Currency and its equivalent
• Investing in real estate
• Provident money
• Insurance
Term Usage Common in the Stock Market
Whether a person is a novice investor or an experienced stock market participant, they have probably heard of the terms below at some point.
1. Agent: An licenced individual acting on behalf of another individual is known as an agent. Due to time constraints and insufficient experience, people hire agents to handle their responsibilities.
2. Broker: For a fee or commission, a broker is an individual or business that carries out purchase or sell orders on behalf of an investor.
3. Ask/offer: The lowest price a seller will accept for the stock is referred to as the ask.
4. Bid: A bid is the greatest amount a buyer is willing to pay to purchase a particular quantity of shares at a particular moment.
5. At the money: An option contract with a strike price equal to the asset's underlying market price is referred to as being "at the money."
6. Beta: A measure of a security's or portfolio's volatility or systematic risk relative to the market, beta is utilised in the capital asset pricing model, or CAPM. Investors can better comprehend how much risk a stock would add to their portfolio overall by looking at beta.
7. Alpha: The excess return on investment over the benchmark index is referred to as alpha. Alpha and beta are frequently combined. It serves as a performance indicator, showing when a trader, strategy, or portfolio manager has outperformed the market return over a given time frame. It is frequently seen as an active return on investment that evaluates how well the investment performed in comparison to the index.
In order to reduce unsystematic risk, active portfolio managers aim to produce alpha in a diversified portfolio.
8. Small cap: A publicly traded firm having a market capitalization of between $2 billion and $300 million is referred to as a small cap. Investors looking to outperform institutional investors by concentrating on growth possibilities favour these companies' stocks. These stocks have beaten large-cap and mid-cap companies in the past. These equities are also much riskier and more volatile.
9. Mid cap: Businesses with a market capitalization of $2 billion to $10 billion are classified as mid-caps. The following are a few characteristics of the businesses in this category:
o Growth in profitability, market share, and productivity are anticipated for these equities.
o The growth curve's midpoint is where these stocks are located.
o They offer stability and growth in moderation.
10. Blue chip: Well-established businesses are referred to as blue chips. These businesses are reputable and steady. Comparatively speaking, these equities are safer than small- and mid-cap companies. These stocks have demonstrated success and steady growth in the past. The market value of these equities is more than $10 billion. These stocks are prone to volatility and failure even if their risk is minimal.
These stocks are typically preferred by conservative investors.
11. Bonds: A bond is an investment security in which buyers lend money to businesses or the government for a predetermined amount of time in return for regular interest payments. The bond issuer repays the investor's money upon maturity.
Businesses issue bonds to fund new ventures, acquisitions, and continuous operations.
12. Book: A trader's book is a list of all the positions they have taken. It displays the trader's total number of open long and short positions. To facilitate trades for their clients and keep an eye on possibilities and risk, institutional traders keep a book.
13. Call option: A call option is an agreement between a seller and a buyer to acquire a certain stock at a specific price with a predetermined expiration date. The right, but not the responsibility, to exercise the option and buy the stocks lies with the call buyer.
However, if the buyer assigns shares to the seller of the call, the seller has the obligation—not the right—to deliver the stock.
14. Put option: A put option contract grants the owner the right, but not the responsibility, to sell a predetermined quantity of underlying assets for a predetermined price within a predetermined window of time. A vast array of assets, including stocks, indices, currencies, and commodities, are covered by put options. Variations in the underlying asset prices, the option strike price, the interest rate, volatility, etc., all affect the put option's price.
15. Open price: The price of the underlying asset at the opening of the exchange is referred to as the open price.
16. Close price: The price of the underlying asset at the time the exchange closes is referred to as the close price.
17. Convertible securities: These are securities that have the potential to be changed into other securities, such as bonds or preferred stock. Convertible securities are typically issued by businesses to raise capital. Call features are typically used by corporations who issue convertible securities as a means of keeping control over their investment. The price of the underlying securities has a major impact on the price of convertible securities.
18. Debenture: A marketable security issued by a company to raise capital for expansion and long-term operations is called a debenture. Debentures and bonds are comparable. In contrast, investors holding debentures are not entitled to the company's assets in the event of a default.
19. Defensive stocks: Regardless of the status of the market as a whole, defensive stocks offer investors steady profits and dividends.
20. Growth stocks: Businesses in this category are predicted to grow their earnings and sales more quickly than the market. Growth stocks have a greater price-to-earnings ratio and appear pricey. However, if the company is expanding quickly, its price can actually be low. The share price will rise as a result.
21. Value stocks: Shares of a business that seem to be trading for less than its fundamentals—like sales, earnings, or dividends—are referred to as value stocks. Consequently, investors find the stock to be appealing. Low P/B and P/E ratios, as well as a high dividend yield, are typical attributes of value stocks.
22. Face value: The nominal or monetary worth of a security is referred to as its face value in the financial world. The initial cost of the stock, as stated on the stock certificate, is its face value.
23. Moving average: A moving average is a popular technical indicator that averages prices continuously to smooth out price data. Moving averages are useful for figuring out support and resistance levels as well as trend direction.
24. One-sided markets, often known as one-way markets, are those in which market markers quote the ask or bid price. When the market is moving in one direction or another, it is said to be in a one-way market.
25. Spread: The spread is the difference in two rates of pricing. A bid-ask spread is the most prevalent kind of spread that we hear about in the stock market. It alludes to the difference between the security's ask and bid prices.
26. Volume: The quantity of shares exchanged between the stock exchange's opening and closing is referred to as volume, or stock trading volume.
27. Dividend: A dividend is the amount that the board of directors determines the company will distribute to its shareholders from its earnings.
28. Dividend yield: The ratio of a company's payout to shareholders for holding its shares to the current market price is known as the dividend yield. Most mature businesses distribute dividends.
What are stocks?
Equity, which is another name for stock, is a security that denotes ownership of a portion of a company. A company's stock certificate is referred to as a share. Businesses sell stock to raise money to run their operations. The stock exchange is where most stock purchases and sales occur. There may be private sales, though.
Various categories of stocks
Basically, there are two kinds of stocks:
Common stocks:
The security denoting ownership in a firm is referred to as a common stock. Any assets that remain after paying creditors, bondholders, and preferred stockholders are distributed to common shareholders in the event that the company liquidates. On the stock market, a variety of equities are traded, including penny stocks, growth stocks, and value stocks.
Investors diversify their assets according to their level of risk appetite.
Preferred stocks:
Preferred stocks, also known as preference shares, are shares of the company's stock that pay dividends to shareholders ahead of common stock. Preference shareholders receive payment from the company's assets before common shareholders do in the event that the business files for bankruptcy.
Investors that are risk averse can be divided into four categories: convertible, non-cumulative, cumulative, and participative.
• Cumulative preferred stock: This kind of preferred stock has clauses requiring a corporation to pay all dividends, even the ones that were overlooked in the past.
• Non-Cumulative Preferred Stock: No unpaid or omitted dividends are paid on non-Cumulative Preferred Stock. In this scenario, the Non-Cumulative Preferred Stockholder will not be entitled to receive any dividends in the future if the company chooses not to pay any during a specific financial quarter or year.
• Participating preferred stock: This kind of preferred stock entitles holders to dividends at the rate at which preferred dividends are normally paid to preferred shareholders, plus additional dividends subject to certain predefined requirements.
• Convertible preferred stock: After a predetermined date, investors who own convertible preferred stocks have the opportunity to convert preference shareholders into a predetermined number of common shares.
Frequently Asked Questions about the Stock Market
What are secondary and Primary markets?
A primary market is where newly issued stocks and bonds are initially offered for sale to the general public. The term "new issues market" is another name for this market. An IPO is the most typical format for new issuance. Underwriting groups made up of investment banks support primary markets by determining the starting price range for a particular instrument and overseeing its sale to investors. The secondary market is where the following trading takes place after the first sales are over.
A broker buys shares in the secondary market on behalf of investors. Since they are not eligible to participate in the IPO, small investors have the chance to trade. Previous-issued shares are traded by investors, and demand determines each stock's price.
What is OTC market?
Securities are traded between counterparties in the OTC (over the counter) market; an exchange is not involved in this transaction. A dealer or broker with expertise in OTC marketplaces facilitates trading through OTC markets.
Stocks of tiny companies that don't meet the exchange's listing requirements typically trade on the OTC market.
What is a bull market?
A market that is expanding and the economy is strong is referred to as a bull market. When an industry or stock is in a bull market, investors believe that it is about to rise in value. Bullish investors think that the market will rise and that they may benefit more by selling their investments later.
The following are a few traits of a bull market:
• A protracted run of rising stock prices.
• A robust and expanding economy.
• High levels of investor confidence.
• A hopeful outlook for the business and the sector.
What is a bear market?
Among the traits of a bear market are:
• The market has fallen from its previous highs by at least 20%.
• Investors lose their cool and become gloomy.
· The nation's economy is not doing well overall.
• The value of stocks declines.
• It affects the earnings of businesses.
A bear market is only a bull market's reverse. Investors are negative about all stocks and the market as a whole during a bear market. They think that in the upcoming time frame, prices will decrease. Bearish investors typically take short bets and benefit in such a situation.
All market kinds, including the stock, bond, and commodity markets, can be described as being in a bearish mood. According to many experts, a bear market technically occurs when the price of the underlying asset falls by 20% or more from its recent highs.
What is the correction of the market?
A market correction is a 10%–20% drop from the most recent peak in the value of the market index or the price of the underlying asset.
A market correction occurs when investors are more inclined to sell than to purchase. There are several reasons why the market fluctuates. These include the economy's slowing down, investor attitudes including their fear of losing money, and outside events.
Correction is typically temporary, lasting a few weeks or months at most. We can observe symptoms of recovery once the major political development, economic shock, or market-influencing factor has had time to pass. A three-month market correction occurred in 2020. Following that, the market recovered.
The distinction between a bear market and a market correction
People frequently confuse bear markets with market corrections. But there's a small distinction. The bear market is characterised by a lengthier period of decline than the market correction, which lasts only a few weeks. It is not limited to a year. A bear market has greater impact than a market correction, which is the outcome of mild market anxiety.
According to experts, doing well during the market correction requires a disciplined and diverse approach. It's also critical to comprehend what's driving the market drop. If the current adjustments have an effect on the market as a whole, it may indicate a prolonged market correction or a bear market.
What is a crash in the market?
A significant, frequently unanticipated decline in the prices of equities listed on the stock exchange is referred to as a stock market collapse. The stock prices could be influenced by a number of factors. A few of these are the state of the economy, disastrous occurrences, and several others.
Market crashes have occurred in the past in 1929, 1987, 1999–2000, 2008, and 2020.
The precise point at which the stock market crashes is unknown. They are, nonetheless, typically recognised as abrupt, double-digit percentage declines in the stock index that occur within a few days. Market crashes have a big effect on the economy.
What is stock market volatility?
The price movement of the underlying asset from the mean price is referred to as stock market volatility. It is a reference to the statistical metric of return dispersion.
The degree of risk associated with the magnitude of variations in the security value is sometimes referred to as volatility. A highly volatile stock or other underlying asset can have a value that is spread throughout a wider range of values. Specifically, we might state that a stock's price can fluctuate significantly over a little period of time if it is very volatile. Conversely, if we state that the stock is less volatile, we are indicating that its value does not change significantly and instead tends to be steadier.
As soon as we hear the word volatility, we frequently want to know how it's calculated. Via the use of variance and standard deviation, volatility may be calculated simply.
First, obtain the closing price of any stock for a given time period (let's say six months).
Step 2: To find the mean price, add up all the values and divide the total by the number of values.
Step 3: To obtain a deviation, subtract each closing price value from the mean value in the third step.
Square the deviance value in step four. It will take away any negative number.
Step 5: Divide the total number of entries by the squared deviation value. The variance is obtained.
Step 6: To find the standard deviation, square root the obtained variance. Understanding the stock's deviation from the mean position will be made easier with the help of the obtained value.
In addition to the standard deviation, beta (β) can be used to compute volatility. When compared to the benchmark index, a beta represents the general volatility. If a stock has β>1, it indicates that it will yield a higher return than the benchmark index, and vice versa. As an illustration: If a stock has a beta of 1.2, it has historically moved 120 percent for every 100 percent move in the benchmark index.
Conversely, if β = 0.8 is present in the stock, it means that for every 100% movement in the benchmark or underlying index, the stock has moved 80%.
The volatility index, or VIX, can also be used to measure market volatility. Option contracts are priced using other techniques such as binomial tree models or Black-Scholes models.
There are a few possible causes of volatility listed below:
• Aspects related to politics and economy
• Sector and industry-specific factors.
• The company's performance.
Interesting Read: How to handle volatility in the markets?
What is an IPO?
Source: Image by Gray StudioPro on Freepik
The process of making shares of a private firm available to the general public through a new stock issuance is known as an IPO, or initial public offering. The companies can raise funds from the public through an initial public offering (IPO).
For the Companies to hold an IPO, they must fulfil the exchange's requirements.
Prior to going public, the business is regarded as private. Since it is a pre-IPO firm, the founder, his family, and friends are among its relatively small number of shareholders. Angel or venture capitalists may also be among the stockholders.
Through an IPO, the company can generate a significant amount of capital while also increasing its potential for growth and expansion.
When are we able to trade?
During the designated stock exchange's trading hours, stock market trading takes place.
Is it feasible to have more than one demat and trading account?
Having multiple Demat accounts is feasible in the majority of nations across the globe. Individuals typically open several accounts for the reasons listed below:
• Effectively divide your portfolio into short- and long-term investments.
• Investors who have numerous Demat accounts can access a range of services provided by different advisory businesses, such as trading tips, investment advice, and financial consultancy.
Why Having numerous Demat accounts enhances the likelihood that investors will be allotted shares in an IPO that is oversubscribed.
Is stock broker-free trading possible?
Using a broker is not required in order to purchase stocks. To buy stocks, bonds, ETFs, and other investment products, investors must, however, use a brokerage, an online shop.
What role does the demat account play in trading?
Investing in and trading shares electronically is made easier for investors with a Demat account. Another name for a Demat account is a Dematerialized account. It enables investors to track all of their investments in bonds, mutual funds, shares, and exchange-traded funds (ETFs) in one location.
Investors that have a demat account can:
1. Secure the way of holding shares and securities.
2. Eliminate theft, forgery, loss, and damage to physical certificates.
3. Transfer shares quickly.
How many sectors are there to invest in the stock market?
Generally, there are 11 sectors on stock exchanges globally. These are:
1. A-REIT
2. Consumer Discretionary
3. Consumer Staples
4. Energy
5. Financial
6. Healthcare
7. Industrial
8. Information Technology
9. Material
10. Communication services
11. Utilities