By Christiana Ioannou
If you’re thinking of stepping into the stock market and are scared to make your first step, we assure you you’re not alone. Yes, that’s accurate share market carries its own risk, but it’s one of the most lucrative spaces if approached with discipline. And this discipline is lacked by most people who show interest in the stock market and invest their capital, and these are the people who account for most of the horror stories.
This article will go about as a guide, trying to explain how the stock market works and what-what not to do while investing in it.
First comes, “What is a stock?”
“Stock,” “share,” and “equity” are the most used terms which are used in financial markets.
Stock/share is a financial instrument that represents the ownership of a corporation. They give voting rights to the person who owns stock in a company and a residual claim on its asset and earnings in the form of capital gains and dividends.
You may wonder, “Why do a company issues shares and divide their voting right and earnings?”.
EXPANSION! Most of the corporate giants we know today started as small start-ups, and to grow and expand their operation; they require capital. And unlike debt financing, corporations prefer equity financing as it does not require repayment hence no stress on companies’ cash flow.
Next in order, “How to own shares? What is a stock exchange?”
Stock exchanges or Security exchanges are secondary markets where traders, stockbrokers, and institutions buy or sell securities (stocks, bonds, derivates, etc.). The biggest stock exchange in the world is New York Stock Exchange (NYSE), followed by NASDAQ and then Tokyo Stock Exchange.
Money question you might be thinking, “How is the price of a share determined?”.
After a company goes public, i.e., it gets listed in the stock market, its shares are traded, and the prices are determined by the market forces of demand and supply. If demand is higher than that of supply, then share price increase and if supply is higher than the demand, then share price decrease.
Ask and bid of a stock determines the stock price. A BID is the highest price someone is willing to pay for a share, and ASK is the lowest price at which someone is willing to sell a share.
“If you don’t find a way to make money while you sleep, you will work until you die.” – Warren Buffet.
Stock market investing is considered to be one of the best routes to achieve victory against inflation. As the quote says, “compound interest is the eighth wonder of the world,” while investing in the long-term power of compounding helps you get rich. You can also make money by active trading, where traders take advantage of small ticks in price.
Let this sink in, Do’s and Don’ts of stock market investing!
Stock markets are not volatile but have other associated risks, so you should be cautious while investing in them.
- Never jump blindly into the securities market. Get yourself educated!!
- Understand your investor profile.
- Know your financial goals
- Time horizon in which you want to meet your financial goals
- Your risk tolerance capacity
- Start with small investments and gradually increase your investments as you gain knowledge and confidence.
- Invest what you can afford to lose. The biggest mistake new investors make is to invest all of their capital in the stock market. Stock markets are lucrative, BUT like any other investment option, they are highly volatile.
- Diversify your portfolio. “Don’t put all your eggs in one basket.” To avoid the stock market risk, do not invest all your earnings, savings, and emergency funds in the stock market. Invest across different market capitalization, sectors, geographies, and asset types.
- Avoid greed while investing as the Stock market IS NOT a money-making machine. Returns expectations should be realistic as it directly correlates with the risk exposure of your investments.
- Avoid unlicensed investment professionals. And don’t invest based on free tips/recommendations.
- Offer that sound “too good to be true” is NOT TRUE! Nothing as guaranteed returns exist in the stock market.
- “Everyone is buying it” pitches. Don’t follow the herd. Ask questions, do your research on the investment opportunity and the investment professional.
Remember, don’t take investing as gambling; start early and go slow. Monitor your investments regularly and beware of fraudsters, report to authorities if you find anything suspicious.
Happy investing!
1 Comment