Stock Market for Beginners : Basic QNA

Basics of stock market

Hey guys, today we are going to discuss everything related to the stock market and how a beginner should start his stock market journey

This article will help you in making wise investment decisions and generate higher returns with minimum risk. Below I have summarised all the questions and answers which every beginner might have. So, let’s start our topic for the day.

1. Why is investment important?

    * Investment is very crucial to generate sufficient passive returns so that we could beat inflation and plan for our retirement or any specific goals in life. Jobs, definitely are our active source of income but our investments will play an important role when we are retired or for times when we are in a financial crisis (example, COVID Crisis)

2. Why should we invest in stocks when we have options to invest in land or gold or any other traditional asset class with minimal or no risk?

    * Any traditional asset class like land or gold will give you only a specific amount of return throughout life. Whereas equity gives you more returns as compared to the traditional asset class, the only thing a person is required to do is to invest into companies which have strong fundamentals and have ethical management (We will be discussing how to pick good stocks in detail in our next article so stay tuned)

    * The second reason why I love equity is we get an opportunity to be a co-owner of companies that are being run by top leaders of the world by investing just a small chunk of our savings and become a part of the company’s growth story. If we compare the CAGR of stocks and other asset classes we can easily find out that the equity market has always outperformed.

    * The ticket size of investing in equity stock is very low as compared to real estate or gold. A middle-class man can easily afford such investments.

3. What are the skills required before entering into the stock market?

    * Understanding the difference between investing and gambling: Before moving ahead, We need to understand that investing and gambling are two different things, I have heard people considering trading as investing but that’s not the case because when you trade, you basically put your capital at risk and you don’t know the outcome there are high chances that your capital might vanish completely, whereas investing is something, a person is putting his hard-earned money, he is definitely expecting a positive return out of it. Investing requires patience and time. A successful investor is a person who does proper research, invests his time, and then invests his money.

    * Research skills: Let me tell you what I do personally, I basically start thinking myself as a businessman and before investing into something I should be damn sure that I could generate returns out of my investment, so below are some of the questions which you can find the answers for while doing your research

        1. Understanding the business model and how does the business earn money

        2. Does the business has any competitive advantage (also known as MOAT) and is this advantage sustainable for at least next 10 to 15 years?

        3. Very important, research on the management of the company and find out each and everything related to them through the internet or whatever sources you can, and if you find a speck of single dirt on them, then this is a red signal and we should stay away from such companies. The management needs to be honest and ethical. For example, the management of Yes bank gave a lot of indications about something fishy going on in the company and the investor still had a chance to save their capital but they chose to remain invested and ultimately, we all know what happened to the bank and the reason being the management of the company.

        4. Quantitative analysis: Understanding the fundamentals of the company, now it’s the time when we start looking at the financials of the company such as profit and loss statement, balance sheet, cash flow statement, notes to accounts, reading annual reports, quarterly reports. (We will discuss in brief about quantitative analysis in our upcoming article so stay tuned)

4. Finding out the history of the company and if the company (or any Key managerial personnel) is involved in any kind of fraud or money-laundering activities.

    * You can easily find out on the web just search it. For example, type Mr. X fraud, history of company A, etc

    * Create a list of the subsidiary company and find out what is the relation between the holding and subsidiary company, and if there is no relation there are high chances that the subsidiaries are only created for doing some unethical activities or any other wrongdoing.

5. Should we only go for Large-cap stock?

    * There is a proverb in finance "Higher the risk, higher the returns"

    * If you are investing in the large-cap stock after doing proper research there are high chances that the company will do well and we could earn a sustainable return in the long run

    * The risk involved in investing in small-cap or mid-cap companies is higher and thus the returns expected are also higher. If we can do a proper analysis and research of a company and find out one, which can give exponential profit and growth, having some competitive advantage and can sustain in the long run will definitely be one of the multibagger stocks which you could have in your portfolio. And if you can’t find one, don’t invest in any small-cap or mid-cap stocks just for higher returns.

    * Never go for the number of stocks you hold rather always go for the quality of stocks, i.e. holding one expensive quality stock is always better than holding ten penny stocks.

6. What if I don’t have so much time to do thorough research or I don’t understand the stock market?

    * There is always an easier way to get your work done, if you are short of time or if you don’t understand the fundamentals, I would still suggest you to invest in the stock market by way of investing in ETFs i.e. exchange-traded funds or index funds or mutual funds. To be concise, these fund houses invest our money into the stock market after doing their research and if you buy units of this fund, you indirectly invest in the market. The drawback is they charge you for their services. You can invest your money into the above funds without doing a lot of research and still earn a higher return than other asset classes. But I would still prefer doing self-analysis and investing in companies that I understand.

 Summary:
Detailed research and analysis is the key to become a successful investor. Always remember there's no shortcut to earn money. Start investing as soon as possible, no matter how small your investment is. Always learn from great investors but never follow them blindly. Invest only that money which you won’t need in the next 3 to 5 years as the equity markets are unpredictable and can give you negative returns in the short term.

If you found my article useful then do comment your views and share it with all your family and friends. Let’s spread financial literacy together.

Thanks for reading.

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