With a predominantly risk-averse nature, Indians have been comparatively slow to warm up to stock market investments. Early scams, instability within the Indian Stock Exchange and other issues contributed to a fair bit of mistrust. A mere 3.7% of the population invests in stocks, while 55% of the population in the United States turns to stocks while investing. Interestingly, with the introduction of investment apps and a consequential boom in India’s FinTech market, more and more people are now open to investing in stocks. In fact, active investor accounts surged by 10.4 million in 2021, indicating that Indians are now open to this investment avenue.
It’s important to understand that investors who have the time to understand stocks are more suited to this investment avenue, as compared to passive investors. If you believe you are the latter, you should consider mutual funds. Click here to read about them.
What are stocks?
In simple words, stocks represent ownership in publicly traded companies. A unit of stocks is called shares, and these shares are traded via the National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE) The price of each share is determined by multiple market factors, and can fluctuate on a daily basis. However, as stocks are intended to be long-term investments, these daily fluctuations are rarely a cause for worry. Over time, investors can sell their share at a profit and grow their wealth.
Let’s look at an example to understand this better.
Ruchi has purchased shares worth ₹1 Lakh in a publicly traded Indian unicorn, with a single share priced at ₹500 . Over time, the company generates consistent, high profits which leads to a surge in stock prices. When her stocks are valued at ₹1000 a piece, she sells all 200 shares and earns ₹ 2 lakhs in the process.
Understanding types of stocks
It’s no secret that some stocks perform exponentially well while others tank in the market. So, how are new investors to protect their wealth?
Fortunately, there is a simple way to prevent significant losses. Most stocks are categorized based on their ability to perform, which makes it easier for investors to select the ones that suit their needs. When you work with a stock broker or a trading company, will come across the following terms and types of stocks:
- Large Cap Stocks
Large cap stocks belong to blue chip companies. The share prices are typically very high, as these companies are not only decades-old, but have proved their mettle by consistently earning profits. The main benefit of investing in such stocks is that you can earn high dividends over time.
- Mid Cap Stocks
Mid cap stocks typically have a market capitalisation of ₹ 250 - 4000 Crores. In terms of dependability, these companies are as well-known and reputed as blue chip stocks. However, they are priced at a comparatively lower rate, making it easier for investors to get a slice of the pie.
- Small Cap Stocks
Companies classified under small cap stocks have a market capitalisation of up to ₹ 250 Crores. However, they also have a high potential for growth and should not be ignored by investors simply because they are categorized in the lowest bracket. Such companies may be new to the market, and can grow quite well over time.
Apart from these categorisations, you’ll also find the following types of stocks:
- Growth Stocks: Such stocks are ideal for investors who want to grow their funds quickly. These stocks typically belong to newer companies that have the potential to do well in the market. As the companies continue to earn profits, investors enjoy the same in the form of increased stock prices.
- Value Stocks: As opposed to growth stocks, value stocks belonging to companies are not in a hyper growth phase any more. These companies now have a consistent, baseline profit and are highly valuable. These are ideal for conservative investors who do not want to expose themselves to volatility.
Investing in stocks based on financial goals
While most investments are made with the goal of increasing wealth, it always helps to identify more specific goals so that each decision can be optimized. A few common goals include securing one’s retirement, paying for a child’s wedding, traveling, education, and so on. Different stock offerings can actually help you set money aside towards each goal, ensuring that every milestone in your life is easy to reach. For instance, you may consider the following types of stocks based on goals:
- Want an early retirement? Choose dividend stocks: if your goal is to retire early or to secure your retirement by ensuring regular income, then dividend stocks are the right option for you. A dividend is a sum of money promised to the investor in the form of regular payouts. Income stocks are a form of dividend stocks, however, they are typically linked with companies that have a mature business model and may not see more growth (like value stocks). Both are ideal options for saving for one’s retirement.
- Want quick, short-term profits? Choose cyclical Stocks: Have you heard of the term ‘playing the market?’. Savvy investors who understand not just financial markets but the impact of geopolitical occurings on global markets often turn to cyclical stocks. Such stocks are linked with businesses that have a cyclic turnover (such as manufacturing, luxury goods, and travel). As they experience large swings in demand periodically, investors can sell and purchase them based on market factors to turn a quick profit.
- Want long-term security? Choose Non-Cyclical Stocks: In contrast to cyclical stocks, these do not have major swings in demand. They are ideal for investors with a lower risk tolerance as they tend to perform well even in bull markets (when the market is not yielding profits). For example, a global pandemic has the ability to shut down supply chains and cause mayhem for cyclical stocks. However, companies linked with non-cyclical stocks (such as a grocery store chain) may not experience a dip in share prices during a pandemic.
- Want to make an impact while earning? Choose ESG Stocks: Short for Environmental, Social and Governance stocks, these are ideal for investors who want their money to go towards a larger cause. For instance, a green energy company aspiring to cut down pollution and make the Earth better for future generations would have an ESG stock.
Affordable stock options: Do they exist?
While the share prices of well-established and highly profitable companies are typically unaffordable for regular investors, there are a few stock options that might be easier to invest in. These are:
- Start small: Look at low-priced stocks offered by stable new companies that want to raise funds to offer their products or services. Such stocks have the ability to offer exponential growth.
- IPO Stocks: These stocks belong to companies that have recently offered their Initial Public Offering (IPO). Think of Indian unicorns like Zomato, Nykaa, and Paytm - their stocks would qualify as IPO stocks.
- Buy when the market is down: This is a great way to ensure you get high-value stocks for a lower price.
How to invest in stocks?
In order to understand how to invest in stocks, you must first understand who a stock broker is. A stock broker is a representative of the financial market who is incharge of selling and buying stocks for clients. In exchange, brokers earn a commission on each sale. Additionally, there are many apps and websites that are linked with stock exchanges. These allow customers to buy stocks online after creating their Demat and Trading Accounts.
As of now, it is not possible for investors to buy or sell shares on their own - doing so without a stock broker is impossible.
In order to invest in stocks, you must:
- Open a Demat Account and a Trading Account
- Connect with your stock broker: Your SEBI-registered broker will help you select shares and purchase them.
- Determine the prices: You can decide a price point for the shares you want to buy or sell and wait for the other party to respond
- Complete the transaction: The shares or money will reflect in your account once the transaction is completed.
Stock Market Investment Guidelines
The following tips can help you enjoy a positive experience when investing in stocks:
- Determine your goals: Goal-based investments are the most fruitful ones as they are targeted towards specific needs. Understanding your financial goals can help you choose the right stocks for your needs.
- Do not let panic determine your actions: Global occurrences such as war, a breakdown in the supply chain, pandemic, or other events can cause stocks to crash. Even celebrity controversies are known to impact the stocks of companies they represent or are tweeting about. Such instances are typically short-lived. Panicking and selling your shares during such moments can cause losses.
- Diversify your investments: Ideally, your stock market portfolio should have a mix of stock types to ensure diversity. This ensures that if one stock fails to perform, the others still secure your wealth. Choosing a mix of cyclical and non-cyclical stocks can be a great approach, and so can choosing a mix of large, mid, and small cap funds.
- Be clear about your risk tolerance: Your risk tolerance refers to the amount of market volatility you can handle. A high risk tolerance means that market volatility won’t cause anxiety or lead to rash decisions. On the other hand, a low risk tolerance means that market volatility will definitely make you lose sleep.
- Leverage stop loss: Stop loss is a system that lets you determine that you cannot handle losses after a certain point. As a result, when a share reaches that level, it is automatically sold to prevent further loss. This can help ensure you don’t end up losing money.
The Bottom Line
Stocks offer a great opportunity to grow your wealth. However, they are often associated with high risks and are not apt for those who cannot stomach them. Stocks can be a great option for both, long-term investors and those who want to trade on a daily basis - choosing between the two depends entirely on your financial goals.
Why choose Hubble Money for short-term savings?
It is essential to diversify your portfolio by investing in long-term and short-term savings plans. Hubble Money lets you create targeted savings plans aligned with products or brands of your choosing. You also earn 10% interest with each deposit, enabling you to meet your goals sooner.
How to create a savings plan on Hubble Money?
To create your plan, you must:
- Select the desired partner brand (for instance, Myntra)
- Select the applicable savings plan displayed on the homepage (for instance, get 10% extra on a savings plan) by clicking the Get Started button.
- A new page will open.
- Select the ‘Customize’ option to change your deposit amount along with tenure.
- Review the plan to verify the selected details.
- Click on the ‘Pay’ button and complete the payment with your desired mode (such as UPI).
- Your savings plan will be made