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stock market investingSummary:
1. What is stock market investing?
Stock market investing means using your money for buying some share of equity in the stock market and holding the stock for a considerable amount of time. Essentially, the investor invests in the market and tries to make money. The other investments options like investing the money in the bank or holding an asset such as a house do not tend to return a favorable return of investment or ROI. So, essentially the stock market is a preferred way of investing. But they need to carefully look about this mode of investment which has its own pitfalls.
What is stock market investing?
It is the people?s investment in the stock market. They buy the shares of companies during, Initial Public Offer or IPO, or by trading it in the secondary market.
Stock market is huge entity where many carry forward their businesses. However there are generally three classes of investors. Retail investor or the individual investor buys some shares of a big company at some amount of time and holds it for a certain period. As the company goes about expanding its business and bring in more revenue, the stock price of the share moves up. For example, a retail investor buys a share say for $ 2 and after successfully completing two quarters of a year, the company gets a profit on selling it products. The company makes or gets money after selling and company is said to get revenue.
Since the revenues of the company get increased, the shares of the company are worth more. So, in essence the stock price of a share also moves up. Say now it becomes $ 5. The difference is what the quarters of revenue brought into the company. So the investor holding on the stock for 2 quarters has made a profit and if he wishes to sell the stock, he makes, minus the brokerage. This is simple principle of stock market investing for the retail trader.
What is the principle for a bank then?
The bank has money deposited with it. It needs to offer interest for the money it is holding. So the best investment option for the bank is to turn to stock market for trading. Let?s take a hypothetical example. When the bank buys the same share for $ 100 and after two quarters makes an extra $10, it might be offering say $ 2 as interest for every $ 100 invested for two quarters. So, essentially the bank has made $ 8 as profit for investing in this stock or in this company.
This is stock market investing principle for the bank.
What is the principle for a foreign government or foreign funds?
The principle for them is hedging and rising inflation. Say the economy of a Company (A) is not doing very well, but loans can be got at a cheap rate of interest. Say the economy of a country B is booming or doing very well. It is rising very fast. So if the country is doing well, the stock market of that country would also essentially be doing very well. On these lines of thinking, the country A\'s government or some institutions of that particular country called FII, invest in the stock market. This is stock market principle for these entities.
Who should invest in stock market?
People who really have money that they do not mind risking are the people who should invest in market. Market at times have their up and down days. Either you should risk losing that money or have time on your side, so that you give enough time for the stock to move back upwards.
What are the opportunities?
Stock market investing is a very liquid form of investing. Since you are holding liquid asset, i.e., which can be disposed off or sold off in an easy and fast manner, is the best asset to have. Compare that to a real estate plot of land or flat which is difficult to sell, and need to find people to sell your asset.
This form of liquid assets and an easy way to sell off is what brings people to stock market investing. Also the returns in a booming market are very good. The investors get 3 or 4 times more money than the average returns they get in other instruments.
What are the pitfalls?
They have been said to carry plenty of risks. The average investor needs lot of time to understand what is going on in the market. So in essence he is investing blindly and the investment may go bad anytime. He does not know under what circumstances, the stock moves and when does it halts. So his method of investing is what makes it risky. Now-a-days, after the introduction of electronic trading, the landscape of stock market investing has changed completely.
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