Stock Market Guide for Beginners
The stock market is a place for buyers and sellers of stocks to come together and
find a price. Once the price is discovered, then the shares change hands at that
price. For beginners the most important thing to understand is that the stock market
is a mechanism for finding what a share is worth and helping investors to create
wealth over the long term.
Remember; equity is a risk asset, but what does it mean?
The normal refrain that we get to hear is that equity is a high risk instrument.
What is meant by high risk? High risk in this context means that the returns could
be very volatile. That is correct. Unlike a bond that pays you regular interest
each year or each quarter, the equity share does not give you any regular assurance.
But the price of the stock will fluctuate with what happens to the economy, to the
industry and the company. However, over the longer run these fluctuations get evened
out and you actually earn much higher returns on equity. That is what makes them
Understanding Basics of Stock Market
It measures and distributes risks
The stock market is basically a mechanism to measure risk. Why do some stocks have
a higher P/E ratio and some stocks have a lower P/E Ratio? It is because of the
risk. Normally, stocks with a higher risk will have a lower P/E ratio and vice versa.
Stock markets not only measure risk but also distribute risk by allocating risky
equities to higher risk takers in search of returns.
Equity markets are for the long term
One cannot hope to make money in stocks in the short run. Of course, it is possible
that the stock you bought became a 3-bagger in less than one year. Such cases are
the exception than the rule. Typically, equities give above average returns only
when the stocks are held for a longer period of time. Ideally 4-5 years holding
period is advisable for long term investors.
As a shareholder you own part of the company
This is an important aspect of being a shareholder of a company. You are not a creditor
but a part owner of the stock. That means you participate in the upside growth and
also in the downside growth of the company. As a part owner, there are no assured
returns and dividends will be paid only if the company makes profits.
Stock markets can be bullish or bearish
What do we understand by bullish and bearish markets? These are common usages and
they refer to markets that are in an uptrend or in a downtrend. There is no clear
definition for bull and bear markets. Normally, a rise of 20% higher refers to a
bull market while a correction of 20% refers to a bear market. Such bull and bear
markets play a key role in determining your investment strategy. You buy in bull
markets and sell in bear markets.
Stock markets are wealth creators in the long run
The important word to understand here is Long Run. Over a period of 1 year, the
stock market may just about get better returns on a bond or and FD compared to equities.
But if you hold on to quality equity stocks over a period of 5-7 years then you
will make big money. That is why patience and perseverance are so important when
it comes to equity investing.
Stock markets are regulated by SEBI and the exchanges
If you are wondering if buying and selling equities is a safe task, then you don’t
worry because the markets are very well regulated by the exchanges and the SEBI.
With tight margining systems, online surveillance, capital adequacy of brokers,
audit of research reports etc, the market is a much safer place today. Even the
trade guarantee that the exchange clearing corporation provides has almost removed
the concept of exchange defaults.
You can buy and sell stocks and indices in the stock market
Last, but not the least, the stock markets give you a very wide choice. You can
buy stocks, you buy indices, and you can buy futures and options. You also have
a choice of mid cap stocks, large cap stocks an d even trade-2-trade stocks. You
can choose from PSU stocks, private stocks and even from global stocks. The moral
of the stock is that you have a really wide choice of shares and stocks available
and you can choose based on what best suits your needs.