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How to invest in stocks? A beginner’s guide to stock investments

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by Ankita Lodh on 19 July 2024,  5 minutes min read

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Investing is the act of purchasing assets that appreciate over time and yield capital gains or income payments. Purchasing stock means you’re placing your money on the company’s ability to expand and do satisfactorily over time. 

As of February 2024, India’s equity market has been trending upward, and there has been a surge in the creation of demat accounts. According to the data, there are already an astounding 148 million demat accounts nationwide. 

Setting specific financial objectives, figuring out how much you can afford to invest, choosing a broker that best fits your trading technique, funding your stock account, and getting started are all necessary steps in the stock trading journey. But first, let’s understand the stock investment basics. 

What is investing?

Those looking to invest in assets with the possibility of capital gains can choose from four fundamental categories: stocks, bonds, commodities, and real estate. Apart from these fundamental securities, vehicles such as exchange-traded funds (ETFs) and mutual funds also purchase various mixes of these assets.

Purchasing stock allows you to partake in a company’s profits and earn partial ownership of it (and the losses). While earlier, the process of investing in stocks happened manually, in a physical location, today, with dematerialisation investors can open a Demat account and start investing from the comfort of their homes. 

Investing vs. trading: What’s the difference? 

Aspect Investing Trading
Risk  The risk involved is comparatively lower as the investment period is longer. This helps to navigate the volatility of the market over time.  More risky as the holding period is shorter and the traders tend to leverage the slight price movements. 
Volatility impact The stock market’s short-term volatility does not impact your investments as the time horizon is longer. Short-term volatility impacts trading experiences as they rely on minor changes in prices. 
Investing period Investors may hold their investments for years or even decades.  Traders depend on short-term volatility to capitalise on market movements. This can range from hours to even weeks. 
Growth of capital Usually, your capital grows over time in long-term investments. Trading is primarily for making quick profits over short-term fluctuations. 
Additional benefits In addition to enjoying additional rewards like dividends, investors get to expand their wealth over time. Traders increase their capital by continuously searching for the best opportunities to execute their transactions and putting methods in place for a profitable trading journey.
Analysis required You need fundamental analysis before investing in a company. Verifying the company’s finances, balance sheets, key ratios, and potential for future growth are all necessary for fundamental research. Traders usually rely on technical analysis. To trade, one must analyse charts, spot patterns in price movements, use indicators to create buy and sell signals, and monitor the market sentiment each day.
Suitable for Investing is mostly suited for individuals who are more keen on long-term wealth creation and patient enough to overcome market volatility. Investing also carries less risk and is more stable. Trading is ideal for individuals who are active in the stock market and can analyse short-term market fluctuations. Trading needs a higher risk appetite than investing. 

Stock investment tips

  • Establish specific investment objectives

First things first, clearly state your financial goals. You’ll stay focused and make better investment selections if you have clear goals. Whether it is for long-term or short-term stock investments, determining your objectives will influence your approach to investing. Your goals are determined by your aspirations and stage of life.

  • Do proper research and avoid individual stocks

Investing in stocks begins with adequate research and knowledge of the stock market. While traders are usually more inclined towards technical analysis, for investing, you need to focus on the fundamental analysis of a stock. Fundamental analysis comprises a business’s fundamentals, like financials, future growth prospects, and business models, to name a few.

Another important stock investment tip you may follow is to avoid investing your capital in individual stocks if you are just starting out. A safe alternative to this method is investing in mutual funds, or ETFs (Exchange Traded Funds), as they hold multiple stocks and are more diversified.

  • Aim for diversification

Diversification is the key to mitigating risk and navigating the market in times of volatility. A diverse portfolio will help you stay afloat when markets are moving up and down to some extent. Also, it will help you improve your overall portfolio gains. 

  • Consider your risk appetite 

Another essential component of investing is knowing your level of risk tolerance. It assists you in adjusting your comfort level to your financial objectives and the inherent uncertainty of the stock market. To understand your risk appetite, you need to self-assess your risk tolerance, considering how at ease you are with the volatility of the stock market. 

Additionally, your investment timeframe will typically determine how much risk you can take. Greater risk may be taken over longer horizons since you have more time to recover from any losses. 

Why should you invest in the stock market?

Now that we have discussed the basics of investing in the stock market for beginners, take a look at the reasons why investing early might be a good idea. 

  • Portfolio growth 

One major advantage of stock investing is the potential for your portfolio to grow in tandem with the economy. Corporations hold stocks, and if these companies expand and turn a profit, the value of your shares might rise.

In the past, there has been a clear relationship between the success of stocks and the economy as a whole. Stock prices often climb in thriving economies, providing investors with the chance to expand their portfolios with economic expansion.

  • Easy to start

Recent years have seen a boom in online brokerage platforms and technological improvements that have made stock investing more accessible. Buying and selling stocks only takes a few clicks, making it an easy choice for novice investors. Without requiring in-depth financial knowledge, people may begin diversifying their investment portfolios thanks to this accessibility.

Also, unlike other investment avenues like real estate, stock investments are easy to start as a beginner. You can start investing even if you have limited access to funds, which is a great advantage for novice investors. 

  • Beat the inflation 

Investing in stocks may give you the edge to beat inflation, since historically, stocks have proven to be a dependable inflation hedge. Over time, inflation reduces the buying power of money, but equities have the potential to yield returns higher than inflation. You may contribute to ensuring that your portfolio maintains its true worth over time by making stock investments.

How to invest in stocks through Dhanush?

Investing in stocks through the My Dhanush app is straightforward. Simply follow the steps below: 

Step 1: Log in to your Dhanush account.

Step 2: Head to the Watchlist section and select the stock you want to buy.

Step 3: Enter the quantity and order type.

Step 4: Check the summary and swipe to buy the stock.

Conclusion

To invest in stocks as a beginner, you need to be mindful of your risk tolerance and have proper knowledge of the market. It is not without drawbacks, though, since there are expenses associated with taxes, market fluctuations, and the requirement for time and knowledge. However, if you are aware of the common mistakes that most novice investors make when they first start, investing in the stock market may be highly rewarding in the long run. 

To read similar blogs on the Indian stock market, click here.

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