Investing In Stock Market Simplified

'Stock Market' the name itself sounds scary for many. We have heard it can make you a millionaire and often read in news that if you would have invested 10 rupees on so and so company in 1980's, you would have become a crorepati by now. Though it is not very clear how. What if I loose all my money? It's not that we have not tried to understand it, but we seem to loose our way after reading and couple of blogs and going through few YouTube videos. Is there a simplified way to understand how to invest in stock market ? Well I had these questions too when I thought of starting to invest in Stock Market like all of you. In this article I will try to simplify things a bit so that we can at-least try our first bid in stocks without becoming an expert.

Why to invest in Stock Market ?

Let's start with the basic idea of investment or saving. Most of us want to save a part of our income so that we can use it in future and since it's our hard earned money we want it to be safe. The idea is also to invest somewhere we do not loose the value of money. For example we can always do a FixedDeposit which is like the most convenient and safe way, however, the rate of interest FD provides nowadays is less than the inflation rate. So for example if I invest 100 rupees in an FD of 5%, it becomes 105 rupee after a year. However if the inflation rate at this time is 6%, the 100 rupee last year is 106 rupee now. So essentially I lost 1 rupee by value in the FD. Hence we look forward to invest in something that will increase with our economy and help us grow above the inflation rate which is quite easily achievable if we invest in stock market.

How to invest in Stock Market ?

First of all to invest in Stock Market you need a demat account which lets you deal (buy and sell) in stocks. You can open a demat account from the bank where you have your savings accounts. However as per my experience there are charges that bank levy to open and maintain your demat account. Hence the best way to open it with Zerodha which is absolutely free, very easy to register, just a few steps from the comfort of your home. And yes it is totally safe as its regulated by SEBI(the RBI for stock exchanges).

Okay, now you have the demat account, but the initial problem still exist. Which stock to buy? how do I know a stock I buy, will make me profit ?

Well to understand this you need to do a lot of research and study and be an expert. However neither I am an expert nor do I know the ways to become one. But yes what I know is there are many experts in the market who are there to help novices like us to help to make sustainable returns. Below are two ways which makes you get a return greater than the inflation rate.

Mutual Funds

What are mutual funds and how they can help us ?

We are not experts on everything that we need in the world, but still we do them. How? we hire experts to do the job for us and pay them for it. For Instance say we need to build a house. Very few people has the skillset to build a house from scratch. Even if one has the skillset, he/she may not have the time to invest on it. So do we not build a house?

We do, because it is a necessity, so either we hire experts like designers and engineers who build it for us or we buy ready made houses which are maintained by a builder.

The story of mutual funds is something similar. Most the mutual funds that you see is normally maintained by a bank. This bank hires an expert who knows which stocks to invest in so that you can get a profit. In return you pay a commission to the bank.

The profit or loss depends upon the risk of the mutual fund and the CAGR(compound annual growth - the percentage of return) value. CAGR % is directly proportional to risk. The riskiest ones invest in stocks which may go up by a high percentage and give you high returns but also may go down and make you a loss. If you want to invest on something sustainable you should invest on the stable ones like Bluechip or Equity Mutual funds. They won't make you a millionaire overnight, but there is almost no chance of loss and provides a return of above 10% per year (CAGR ~ 10% ) in general. When you select a mutual fund you can also deep dive and see which stocks a mutual fund invest in. So if you have some idea about stocks you can select the fund that has stocks of your choice or you can just select based on the risk level.

While investing in mutual fund you can invest in two ways:

1. Lump sum : With this method you invest all your money you want to invest at a go.

2. SIP : Systematic Investment Plan, with this you invest a fixed amount every month.

Its always better to do a SIP as you do not know whether market will go up and down tomorrow, so if you have invested in lump sum when the market was quite high than the average, then there is a chance you do not get good returns. A SIP on the other hand will be done every month so will distribute you investment timeline and helps you maintain a better average. By the way, the market score is called the Nifty score.

SmallCase

What are SmallCase and how are they different or similar from Mutual Funds ?

SmallCase is a group of stocks that is created by an organisation or a single person who are the so called experts. A SmallCase contains a set of certain type of stocks that are again associated with a CAGR and risk value. So for instance you can have an IT SmallCase with a group of IT companies like Facebook, Google, Apple, Infosys etc, or you can have a SmallCase for Tata group which will include Tata stocks like Tata Motors,TCS, Tata Power etc. Again each of these small cases are associated with a CAGR and risk value. Hence you can choose wither by a domain or by its CAGR and Risk Value.

One of the major ways by which SmallCase differ from Mutual Funds is that the manager can change the stocks in a SmallCase anytime, though it will only reflect on your portfolio or will be applicable for you if you accept it. Let me explain how it happens.

Suppose you have purchased the IT SmallCase which includes Facebook, Google, Apple and Infosys for example, that has a CAGR of 10% and you have paid 100 rupees to purchase it. Now after some time the manager feels that the Infosys stock on this smallCase is going down and he should change it with another stock say Amazon to maintain the 10% CAGR. So he will send a request that to maintain a 10% CAGR they need to sell the Infosys stock and buy the Amazon stock to everyone who has purchased this SmallCase. Now the user in this case you, has the authority to either approve it and go with the new set of stocks or reject it and continue with the old set. This is called rebalancing a SmallCase. Also the rebalancing might have some charges which will be visible to you prior you choose to rebalance or not.

SmallCases can also be bought as one time or SIP like Mutual Funds. However some Mutual Funds may have a lock in period, before which you cannot withdraw the money, which is not the case with SmallCases.

These are a couple of ways I have learnt to invest money to get a decent return. If you have better knowledge on stock market you can go ahead and invest in stocks too or you can distribute your portfolio to invest in stocks, Mutual Funds and SmallCases. Whatever you choose please do invest in something and do it regularly to reap the benefits of compounding and make a secured future. Happy Investing!