Stock Market for Beginners : Basic QNA

Hey guys, today we are going to discuss everything related
to the stock market and how a beginner should start his stock market journey

This article will help you in making wise investment
decisions and generate higher returns with minimum risk. Below I have
summarised all the questions and answers which every beginner might have. So,
let’s start our topic for the day.

1. Why is
investment important?

    * Investment is
very crucial to generate sufficient passive returns so that we could beat
inflation and plan for our retirement or any specific goals in life. Jobs,
definitely are our active source of income but our investments will play an
important role when we are retired or for times when we are in a financial
crisis (example, COVID Crisis)

2. Why
should we invest in stocks when we have options to invest in land or gold or
any other traditional asset class with minimal or no risk?

    * Any traditional
asset class like land or gold will give you only a specific amount of return
throughout life. Whereas equity gives you more returns as compared to the
traditional asset class, the only thing a person is required to do is to invest
into companies which have strong fundamentals and have ethical management (We
will be discussing how to pick good stocks in detail in our next article so
stay tuned)

    * The second
reason why I love equity is we get an opportunity to be a co-owner of companies
that are being run by top leaders of the world by investing just a small chunk
of our savings and become a part of the company’s growth story. If we compare
the CAGR of stocks and other asset classes we can easily find out that the
equity market has always outperformed.

    * The ticket size
of investing in equity stock is very low as compared to real estate or gold. A
middle-class man can easily afford such investments.

3. What
are the skills required before entering into the stock market?

    * Understanding
the difference between investing and gambling: Before moving ahead, We need
to understand that investing and gambling are two different things, I have
heard people considering trading as investing but that’s not the case because
when you trade, you basically put your capital at risk and you don’t know the
outcome there are high chances that your capital might vanish completely,
whereas investing is something, a person is putting his hard-earned money, he
is definitely expecting a positive return out of it. Investing requires
patience and time. A successful investor is a person who does proper research,
invests his time, and then invests his money.

    * Research
skills: Let me tell you what I do personally, I basically start thinking
myself as a businessman and before investing into something I should be damn
sure that I could generate returns out of my investment, so below are some of
the questions which you can find the answers for while doing your research

        1.
Understanding the business model and how does the business earn money

        2. Does the
business has any competitive advantage (also known as MOAT) and is this
advantage sustainable for at least next 10 to 15 years?

        3. Very
important, research on the management of the company and find out each and
everything related to them through the internet or whatever sources you can,
and if you find a speck of single dirt on them, then this is a red signal and
we should stay away from such companies. The management needs to be honest and
ethical. For example, the management of Yes bank gave a lot of indications
about something fishy going on in the company and the investor still had a
chance to save their capital but they chose to remain invested and ultimately,
we all know what happened to the bank and the reason being the management of
the company.

        4.
Quantitative analysis: Understanding the fundamentals of the company, now it’s
the time when we start looking at the financials of the company such as profit
and loss statement, balance sheet, cash flow statement, notes to accounts,
reading annual reports, quarterly reports. (We will discuss in brief about
quantitative analysis in our upcoming article so stay tuned)

4.
Finding out the history of the company and if the company (or any Key managerial
personnel) is involved in any kind of fraud or money-laundering activities.

    * You can easily
find out on the web just search it. For example, type Mr. X fraud, history of
company A, etc

    * Create a list of
the subsidiary company and find out what is the relation between the holding
and subsidiary company, and if there is no relation there are high chances that
the subsidiaries are only created for doing some unethical activities or any
other wrongdoing.

5. Should
we only go for Large-cap stock?

    * There is a proverb in finance “Higher
the risk, higher the returns”

    * If you are
investing in the large-cap stock after doing proper research there are high
chances that the company will do well and we could earn a sustainable return in
the long run

    * The risk
involved in investing in small-cap or mid-cap companies is higher and thus the
returns expected are also higher. If we can do a proper analysis and research
of a company and find out one, which can give exponential profit and growth,
having some competitive advantage and can sustain in the long run will
definitely be one of the multibagger stocks which you could have in your
portfolio. And if you can’t find one, don’t invest in any small-cap or mid-cap
stocks just for higher returns.

    * Never go for the
number of stocks you hold rather always go for the quality of stocks, i.e.
holding one expensive quality stock is always better than holding ten penny
stocks.

6. What
if I don’t have so much time to do thorough research or I don’t understand the
stock market?

    * There is always
an easier way to get your work done, if you are short of time or if you don’t
understand the fundamentals, I would still suggest you to invest in the stock
market by way of investing in ETFs i.e. exchange-traded funds or index funds or
mutual funds. To be concise, these fund houses invest our money into the stock
market after doing their research and if you buy units of this fund, you
indirectly invest in the market. The drawback is they charge you for their
services. You can invest your money into the above funds without doing a lot of
research and still earn a higher return than other asset classes. But I would
still prefer doing self-analysis and investing in companies that I understand.

 Summary:

Detailed research and analysis is the key to become a
successful investor. Always remember there’s no shortcut to earn money. Start
investing as soon as possible, no matter how small your investment is. Always
learn from great investors but never follow them blindly. Invest only that money
which you won’t need in the next 3 to 5 years as the equity markets are
unpredictable and can give you negative returns in the short term.

If you found my article useful then do comment your views
and share it with all your family and friends. Let’s spread financial literacy
together.

Thanks for reading.