A Beginner’s Bible for the stock market and How to start creating a portfolio?
In this article we will cover all the basics and all the jargon of the stock market which people are so scared of 😥😱
This article covers the very basics of the stock market and if you are one of those who are just starting or want to start your investment portfolio then this is the article for you.
What is Stock market??
Stock market is a place or also known as “exchange” in which people sell and buy shares of a LISTED company in that exchange. Here everyone tries to buy a share and when its price goes up they sell the share and book profit.
What is INDEX or INDICES?
Index is the sum of the prices of all the shares of top companies in the exchange or market. It can be the sum of top 30 or 50 or 500 companies of that exchange. It is calculated weighted according to their Market Capitalisation(Company size in Crores).
- SENSEX — Sum of the top 30 shares in BSE or Bombay Stock Exchange
- NIFTY — Sum of the top 50 shares in NSE or National Stock Exchange
- S&P 500 — Sum of the top 500 shares on NYSE or New York Stock Exchange
How to buy and sell Shares?
As a retail individual one can not directly interact with an exchange. One needs to interact with the broker and broker on the individual’s behalf interact with the exchange. All brokers charge their brokerage on buying and selling the shares. Each broker has different brokerage rates and AMC (Account Management Charges) and Account Opening Charges.
What all Accounts do you need?
In total we need 3 accounts:
- Bank Account — The account that holds your money with the same PAN card that you registered with the broker
- Demat Account — DeMaterialised Account is the account that just holds your shares and does nothing else
- Trading Account — This is the account through which you actually place buy and sell orders.
Both Demat and Trading accounts are usually opened simultaneously with the broker and a lot of banks also offer three-in-one account. An individual can have more than one Demat and trading accounts but all of them should have the same PAN card number.
What is Risk?
Suppose you want to buy a phone of 50k and you ask your friend who is a so-called “Techie” and he recommends you a phone, will you blindly buy the phone?. Isn’t it just like playing poker you just blindly bet on your cards and “Hope” that you will win.
High Risk High Reward is pretty Wrong
The biggest risk is “not knowing what you are investing in”. If you are well aware of what you are buying and confident in your research you will be able to buy a good share and book profit but most of us just want tips and get a free lunch or quick money.
The Market is designed in such a way that people come in at the highest and lose money and people who are here for a long time make money.
How to create a mindset and which stocks to buy?
First, finalize 3 to 4 sectors that you are really interested in and hear a lot about. First sector can the sector you work in like Tech, Automobile, FMCG, Metal, Tourism, etc. It totally depends on your interest in which sectors you want to invest.
Do not buy stocks that are not of your sector. Keep the focus on your sectors only and don’t leave any good opportunity that comes in your sector. Do not get distracted by some stock doing really well in some other sector.
If you keep jumping between the sectors you will most probably miss out on all the big fishes. Be very well aware of all the stuff happening in your sectors.
Stay away from the News and Noise which is not of your sector and stay away from stocks in focus because by the time you will get to know about them the price would have been probably shot up and they would be too expensive to buy.
The spectrum to look for
Try to stay away from the extremes of the spectrum
- Left side of the spectrum — Things that are dangerous and are highly taxed like cigarettes, alcohol, energy
- Right side of the spectrum — Things that are used a lot like banks, oil and gas, finance as they will be very volatile and get affected the most when the market falls
Try to have a balanced portfolio with some defensive stocks that are less volatile and some aggressive stocks that are in the extreme of the spectrum.
Planet and Satellite strategy
First when you start to buy stocks, buy very less volatile and financially strong stocks like the core of the planet and buy them in big amount and wait for a while to let them grow.
Then make the crust of the planet with are stocks that are volatile but very reputed and well-managed companies. Buy them in lesser quantity than core stocks.
Then you can buy really volatile stocks in small quantities which are of new and upcoming sectors and small companies.
Some fancy terms and short forms
- IPO — Initial Public Offering — A company that is not listed on the stock market is now coming with IPO and people can buy shares directly from the company and trade them on the market.
- FPO — Further Public Offering — A company that is already listed on the stock market now wants to dissolve more shares in the market. This is mostly done to raise funds.
- OFS — Offer For Sale — This is pretty much the same as FPO but only top 200 companies can do OFS directly. This happens when only the promoter wants to sell their shares.
- Buyback — If a company wants to buyback its shares from the shareholders they issue a buyback usually higher than the current market price.
- Rights Issue — When promotors want to raise additional capital from the existing shareholders they open a rights issue. A rights issue leads to the creation of new shares that are offered to the shareholders, which dilutes the value of the previously held shares.
- Stock Split and Bonuses — In Stock Split the number of shares is increased but the market capital of the company will remain the same. If there is a stock split of 1:10 this means if you have 1 share of that company now you will have 10 shares of that company but the price would now be 1/10th of the older price and the face value is also 1/10th now. Bonuses are like free shares given by the company to the shareholder so the number of shares increases but the price goes down but the face value remains the same.
