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Guide to the Stock Market for a First Timer



In order to grow or multiply money people invest in different options like land, gold, apartments, fixed deposits, public provident funds, post office schemes etc. There is another option to invest ones money which is in the stock market. Investing in stock market appears attractive because of the huge returns it can give. At the same time there is also an equal amount of risk involved in it. Let’s look at how the stock market works and how one can invest in it.

How do stock markets work?

Stock market is basically a place where buyers and sellers meet. Buyers invest their money in Companies expecting a profit in the future. Sellers are the Companies which come to the stock markets to sell shares and the buyer becomes a part owner of the Company. Although shares and stocks are used interchangeably many shares make up a stock. The buyer buys the shares and becomes a part owner of the Company as he has given money to the Company to run its business. He is therefore entitled to any profits the Company makes. The investor needs to know that the Company can also run into losses.

How to invest in the stock markets?

1. Let someone else do it for you: If you want to invest in the stock market and do not know how to go about it investing in mutual funds is the way. You along with a number of investors pool in money so that it can invested collectively in the stock market. There are mutual fund schemes from Companies like Franklin Templeton AMC, HDFC AMC, SBI AMC etc.(AMC stands for Asset Management Company).You can choose from the various schemes launched by these Asset Management Companies. The AMC charges fees for handling your money. The money collected after subtracting the fees/charges of the fund is invested into the stock markets called an equity mutual fund where at least 65% of the money is invested in shares. When you invest in a mutual fund you avail the services of a portfolio manager. This manager is well versed with the stock market and will use your money to buy or sell stocks after he does the research on the Companies. This saves you the time and effort on doing research as well as makes up for the lack of experience you have in the stock market.

2. Do it yourself : You can save on fees/charges of the portfolio manager of the mutual fund and other charges such as administration charges if you invest in stocks yourself. Investing directly in the stock market involves market risk as you have to handle investments and make decisions yourself.If stock markets do well and so do your shares there is no other investment which come even close to the returns they give you. If you decide to invest directly in the stock market you would need to open a Demat and a Trading account.

Why do you need a Demat account?
Nowadays shares are bought and sold in electronic format. In order to do so you need a demat account. Like how you need to have a bank account to store money, in a similar way you need to have a demat account to store your shares in electronic or “dematerialized” form. The word demat comes from dematerialized. You can open a demat account at any of the major banks or stock brokers (Share Khan, Angel broking , Edelweiss broking etc.).

With a demat account you can only hold/store shares in the electronic format. In order to buy or sell shares you need another account called trading account.

Why do you need a Trading account?
When you buy shares money moves out of your bank account into the trading account. The shares are then stored in the demat account .If you sell the shares they are removed from the demat account and sent to the trading account. They are then sold to the buyer and the money obtained is sent to your bank account.You have the choice of opening a trading account in the same bank in which you have the demat account or with a stock broker.

Do your research before investing
For example if one is investing in a plot of land one would check different factors like location , if there could be any pending cases or disputes etc. so that one is sure of the investment he is making.In a similar way one needs to check the Companies growth potential, the products it sells, the management of the Company and its ability to compete against its rivals. The financials of the Company tell us about the health of the Company and one needs to carefully take a note of the news and announcements of the Company. The above was a brief write up on investing in the stock markets as a beginners guide. In case one wants to learn more he should research and study more about the topic.

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