Equity investments essentially mean investing in the stocks of companies. Stock markets captivate the imagination of every investor but for someone starting afresh.
It can be a daunting place. It is intriguing to see how fortunes are made and lost, companies rise and fall or how simply the opening and closing of markets become headlines in themselves and affect the economic sentiment. It, definitely, is a financial world that needs more understanding than other instruments of investment and perhaps also a different mind makeup.
So, where do we start from?
The bare minimum basics ask us to define what a stock is. Simply put, when a company wants to grow and raise capital for expanding their business, they open ownership of their business to the public to become a shareholder and own a portion of the company. The company grows- the value of your stock increases and vice versa. Now, there are several compliance prerequisites for a company to list itself in the stock market but most importantly they should show a growth trajectory and must have a minimum net worth as per SEBI guidelines for people to understand the value and make sound decisions about buying stocks.
So, say you have decided to start your journey, the first thing ideally to do is educate yourself. Start reading financial news and perhaps take an online course or pick a book or two. A few that come highly recommended are The Little Book of Common Sense Investing by Jack Bogle, The Intelligent Investor by Benjamin Graham, Stocks to Riches by Parag Parikh and How to Avoid Loss and Earn Consistently by Prasenjit Paul.
Now this process can continue as long as you stay invested in the markets as this is a fascinating world and once in, you will find yourself following stock gurus and experts galore. A word of caution, listen to everyone but only do what your financial advisor asks you to do for there will be plenty of influencers but only your financial advisor would know what you should or should not do.
Then comes setting and evaluating goals. It is necessary to understand that equity investing forms a part of an overall investment portfolio that can consist of several other financial instruments of different types. Since a stock represents ownership in a business, it follows that the risks of the business will impact the value and hence the price of the stock. Since businesses have cycles that might bring profits/losses at different times, the investment in business through stock ownership should be for a sufficiently long period to gain out of the profits/growth and to tide over losses/lull in growth. Hence, the advice that equity investing is for the long term.
Also, you must keep your financial plan in front of you to figure out your investment horizon and risk appetite. Are you saving to buy a home, fund an education loan, or make an emergency or retirement fund? Based on these factors, you can evaluate the suitability of equity as an investment avenue for you. If you are learning to invest on your own, start with an assumption that there will be mistakes made. It is advised that perhaps the money you are putting in initially should be an amount that you can afford to lose and is not the money you are hoping to multiply to pay debts or loans. This should be money parked and put aside solely for this start.
On the operational side, you will need to have three accounts in place- a savings account, a demat account and a broking account. All three can be opened with a Bank (three-in-one account) or separately as per your convenience. The costs will differ for different entities. Ideally, you should evaluate the players on the basis of safety, convenience (ease of operation) and costs.
Another option to participate in equity investing is through the mutual fund route. Equity mutual funds offer different types of schemes. These could be actively managed or passively managed. Passively managed funds are those that replicate an index like say BSE SENSEX or BSE BANKEX. These funds will just replicate the index, so there are no stock-picking skills of fund managers involved in these. On the other hand, actively managed funds will have fund managers picking stocks from a range available to them as per the mandate of the scheme. There are several categories of equity funds that are available, ranging from index funds to large-cap/mid-cap/small-cap/flexi-cap/multi-cap funds, sectoral/thematic funds etc.
When using the mutual fund route to invest in equity, you leave the stock selection to a professional fund manager and her team. Due to economies of scale, they are able to provide a wider exposure to the investor at a very reasonable cost. One of the highly recommended ways to invest in equity through mutual funds is to set up a recurring SIP or (Systematic Investment Plan,) which enables a consistent monthly investment over time and also ensures that one is not entering the market with a large sum of money at the wrong time, swayed by emotions or herd mentality.
Digital natives look at stock markets as a place to make easy quick money - However, history is replete with examples of riches to rags. Hence it is best advised to shift your horizon from the short term to medium to long term and use the stock markets to build wealth in a safe, steady and reliable manner.
Disclaimer: This article is for educational purposes only. Nothing discussed here should be considered financial advice and you must do your due diligence or take the advice of a SEBI-certified investment advisor, before advisor before you take your investment decision. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
The article is published in collaboration with the BSE Investors’ Protection Fund to spread awareness with respect to personal finance and investing, especially for women.
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