This is the continuation of a previous article on Understanding the Stock Market and How it Works. I recommend that you read it first.
So since now, we know how the stock market works and whether you should invest in it or not, let's talk about how to invest in the stock market and what you need to have in order to invest in the stock market.
Why invest in the stock market?
First of all, I guess you would want to ask why to invest in the stock market in the first place. Why not put your money in a bank in the form of a fixed deposit or buy some property out of it?
This is because in most cases banks offer an interest rate of around 4-5% or 7-8% at best. But if you invest the same principal amount in the stock market, you might get an interest rate of about 10-12% which can even increase further.
Also, if we assume that inflation rises around 3% every year, then if you put your money in the bank, you will have only around 2-3% of the profit.
Real estate has been a tried and tested method of investing. But if you want to invest in real estate you need to have a lot of cash at your disposal. In the case of the stock market, you do not need to have a lot of cash. I myself bought a stock for 48 rupees.
Creating a DEMAT Account
A DEMAT Account is an account that you need to have with a broker in order to invest in the stock market. A broker is someone who is authorised by the SEBI or the Securities and Exchange Board of India, to handle the transactions that take place in the stock market.
There are plenty of brokers and some of them have been companies that have grown a lot recently which includes Zerodha, Groww, Octafx and others to name a few.
Where are the stocks listed?
Stocks are listed on the Stock Exchange markets. In India, we have two stock exchange markets, NSE or the National Stock Exchange and BSE or the Bombay Stock Exchange. These two stock exchange markets open at 9:15 AM and close at 3:30 PM every day from Monday to Friday and are closed on national holidays. These two stock exchanges list the price of every stock and its movements.
How to put money in the stock market?
So, now we know where and how to invest in the stock market, let us talk about investing.
There are two methods of putting money into the stock market, short-term investing or Trading and long-term investing or Investing.
Short-term investing or Trading
Short-term investing or Trading refers to the situation when you buy the stock of a company with the intention to sell it after some time. It can be after 1 day, 1 week, 1 month or even 1 year.
Trading requires you to analyse the current performance of the company and the stocks which you are going to purchase. This involves analysing whether the company is going to have a profit or a loss in the near future which will directly affect its stock price. This is what you call Technical Analysis.
Long-term investing or Investing
Long-term investing refers to the situation when you buy the stocks of a company with the intention to keep that money in there for a long period of time that can range from 5 years to 50 years. In investing, you do not put your money all at once as you do in trading. Investing requires you to be patient and analyse the performance of the stock for a long period of time. It requires you to analyse the fundamentals of the company which includes analysing the growth of the company that will happen in the next 5-10 years.
This is what we call the Fundamental Analysis of the stock. Fundamental analysis of a stock lets you be sure that you will trust the company with your money for the coming 5 to 10 years.
Trading vs Investing: Which one should you do?
So now we know about both trading and investing, let us figure out which one would be more suitable for you.
Trading requires you to be extremely analytical in your judgement on whether to put your money in a stock or not. You have to be looking at the stock price every now and then. But as much as hectic trading may sound, it can give you a huge reward in a short period of time. If you want an example just look at Bitcoin
Whereas investing requires you to be slow and steady in you putting your money in the stock market. It requires you to be thorough in your analysis and then you do not have to worry about your money for a long period of time. Though in the case of investing, you will also get a huge reward at the end of a long time this will lead you to not be worried about your money.
Written By Arnav Puri
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