Finance: 5 Things to observe before entering into the Stock Market

What is Stock Market?

Warren Buffet once said ‘Stock Market is a device for transferring money from the impatient to the patient.’

Though this looks scary, it is true. Now, before getting further, let me explain what a stock market is in simple terms. It is yet another market where registered people can buy and sell items. Here, the items are nothing but the stocks.

Now, let us understand what the stocks are. Stocks (or) Shares are ownership claims on business entities. To understand it better, let me give you an example. Let us consider Mr.X wishes to start his or her own business. Mr.X can start the business either using his or her own money or with money borrowed from others. Now, if you contribute a share of the money to Mr.X to start the business, then you are automatically entitled for a portion of ownership of that business depending on your share on the total investment. Similarly, stocks or shares give you a portion of ownership rights on the companies you invest. Stock Market is a place where you can buy and sell shares.

The main aim of this article is to give an introductory insight and bust few myths about the stock market. This article will be very useful for those people who are at the shores and staring at the sea (stock market) and don’t understand how to fish (make profits).

Interesting things to observe about the stock market:

i) Stock Market is not gambling:

Many people think that the stock market is another form of gambling. This is the main reason why many people tend to stay away from it. A study shows that only 3% of working Indian population invest in stock market.

Now, there are two kinds of people who spread this myth. First are those who are reluctant to enter into stock market. These people are convinced from hearsay that the stock market is another form of gambling. Second are those people who have entered the stock market with the intention of making quick gains and got hurt.

Now, to make things clear, stock market works based on simple supply- demand relationship. Also, stock market is not an instrument to make quick money.

ii) Don’t succumb to the concept of ‘greed’ and ‘fear’:

Greed and fear are enemies to the investors in the stock market. Most of the investors succumb to these factors. During the times of recent pandemic, one of my friends sold his entire portfolio of stocks even if it meant to incur heavy losses. What drove him to do this?

Fear of losing money since the stock market is down. But, as an investor, you must understand the fact that this is the time to purchase stocks of quality companies at a cheaper price. When the stock market recovers (surely it would in a short period of time)ripe profits are assured due to concept of compounding. Those who would have followed or will follow this concept will become multi-millionaires.

iii) Do Your Homework:

Let me tell you about the art of investing in the stock market. People who invest must have basic knowledge of prevailing macro-economic conditions. Then based on those inputs, favourable sectors and companies must be shortlisted.

Once a company is shortlisted, then financial analysis of the company has to be done through the quarterly or half-yearly or annual results released by the company. The timing of investing in a particular company can be done through technical analysis of charts.

I will go through in detail about the above process in one of my later blogs. Fortunately, all these information are readily available on the internet.

iii) Fix clear goals:

People should set their financial goals very clearly. We should know to differentiate between short term and long term goals. Let me explain this through an example. Buying a watch next month might be a short term goal whereas building a house in 2 years is a long term goal. My opinion is that investment in the stock market serves best for long term goals. I am speaking on behalf of a person who has a full time job and can devout a maximum of 6 hours per week in the stock market both for preparation and investment. Now, how to achieve our short term goals. Let me explain in one of my later blogs.

iv) Have a discipline:

I have seen people telling me that the stock market has given them negative returns. On deeper analysis, I have found out that a large portion of such people had invested once, a huge sum of money in the stock market and totally forgotten about it. Stock market is not the game for such players.

Investors in the stock market should constantly monitor the performance of their stocks. Also, investors must maintain a strict discipline of investing. My personal take on this is to systematically invest (monthly or quarterly) for astounding returns.

Finishing touch:

Already, I can hear people reading this article saying that, why should I put in so much of effort to gain returns when I can very well put my hard earned money in a bank deposit and enjoy peacefully.

I can clearly state here that the only way your savings will beat the inflation by a huge margin is through investing in a stock market. It is like flying in an aeroplane or operating a nuclear reactor. When you follow proper safeguards, the results would be magical.

Happy Investing :)