Beginner’s guide to investment in share market

Traditionally, gold and shares are the foremost wanted investment arena for Indian investors. However, if you’re somebody wanting to take a position in shares in India, and are simply beginning, you will have many questions in your mind.

In this beginner’s guide we will get answers to basic questions related to investment in stock market.

How can a beginner invest in shares in India?

let’s have a look at what a beginner must do to get started with their stock market investments.

What is a share?

If you own a share, you own a portion of a company. In the same way, you can see your ownership of a company as a slice of pie, cut out of a bigger pie.

Someone who owns one or more shares is called a shareholder.

As a shareholder you have essentially put your money on a bet as to how well the company is going to perform over the coming years, meaning you get a say in the future of the company so that you can protect your investment because if the company goes down, you lose a lot of money.

Shareholders may receive cash flows (dividends) if a company’s board of directors declare that the company has performed well and has enough profit to distribute to its shareholders.

A share in the company gives you the right to vote on decisions affecting the company.

You can also call a share, ‘equity’ or ‘stock’.

What is the share price?

The share price is the price at which a particular share can be bought or sold. The share price is determined by the supply and demand for a particular company’s shares.

Factors affecting the share price

When you have more buyers than sellers for a particular company’s shares, share prices usually rise because these shares are in demand.

When you have more sellers than buyers for a particular company’s shares, share prices usually fall because there are more of these shares available.

If a company is very profitable, a share in that company will become more valuable because more people think that it is a good investment.

Factors such as economic and political events also influence share prices.

What is a Dividend?

Investing is not just about buying and selling shares as there is a little thing called dividends, which is essentially an income for shareholders.

Dividends are usually paid twice a year and come from the company’s profits. These dividends can then be pocketed by the shareholders or used for further investing.

The CEO or Director might, however, decide to use the majority of the dividend money to expand the company, so it’s not a sure fire thing.

How do I know which company to invest in?

Do research on the stock market through regular reading of financial literature, attending investment courses and seeking a qualified expert’s (like a stockbroker) advice.

Assess the company’s financial wellbeing by looking at their financial statements and reading analyst reports on the company.

This will enable you to make educated decisions on which companies to invest in.

Determine how much risk you want to take on, how much return (profit) you expect and which investment products meet your needs. Consult a stockbroker if you need additional advice.

Try to be committed to this investment objective. Always remember that you should invest for the long run, e.g. have a 5-year investment objective.

Determine how long you are prepared to wait for a return on this investment and be patient. If a share does not perform you may need to review your strategy.

Invest with money that you do not need in the short run and can afford to lose, i.e. your disposable income after all your day to day needs have been taken care of.

Although investing allows you to make a good profit you should also be aware of the risk of losing money in the short run.

You will need to learn fundamental analysis and technical analysis to earn for the long term and short term.

What is the RISK?

Risk is the possibility of losing part or all of your initial investment or the likelihood of making a profit that is less than what you anticipated.

Different securities or products have different levels of risk. Securities that are regarded as

lower risk securities include:

• Cash in a bank or money market account that earns interest;
• Government bonds (an interest-paying debt instrument issued by the government with a redemption date of one year or more after its issuance);
• ETFs (even though similar to shares).

Higher risk securities include:

• Shares, warrants, derivatives, and corporate bonds

Is there a risk involved when investing in shares?

Investing in the stock market is riskier than some other investments. The reason for this is that share prices rise and fall all the time as economic and market forces change.

However, the higher risk involved also means that you have an opportunity to make a greater profit. Usually, higher risk means a higher return (profit).

It is important to realize that share trading normally does not make you rich overnight, but that it should be treated as a long term investment.

Can I minimize the risk of my investment?

You can minimize your investment risk by diversifying your investment.

‘Diversify’ means to invest in a variety of different investments. To protect your investment you should avoid putting all your ‘eggs’ in one ‘basket’. When one company’s share price doesn’t perform well, you can still benefit when your other company’s share price does well.

Consider choosing your investments from a variety of sectors, companies and investment products.

To help you with this decision consider regularly reading financial literature, attending investment courses and seeking a qualified expert’s advice.

Tip

If you want some extra income, invest in a highly profitable company even if it looks like their shares aren’t going to rise. Check the list of books for becoming a successful investor.

Initially, you will learn a lot of new sharemarket terms but soon you will use to with it.

If the company is making a lot of profits than their share costs go up and if the exchange is actually healthy in general, then individual shares go up for many alternative companies as well.

You can get cheaper shares that may undoubtedly flip a profit, therefore check that you have got an honest stockbroker and continually maintain to date with things like annual reports and any worrying news things.