What are the Risks and Benefits of Investing in the Stock Market?

Stock market investments are one of the most attractive and talked about. This article explores the process, risks and benefits of investing in the stock markets. But before we get into the nitty-gritty of stock market investing, we need to understand what is a stock market.

Introduction to Stock Markets

The stock market is a collective term for all financial markets and exchanges where shares of public listed companies are traded. Stock markets can be classified into primary and secondary markets. The primary market is the market in which public listed companies can issue new shares to raise capital. Secondary markets facilitate the buying and selling of already issued shares. The securities markets in India are regulated by the Securities and Exchange Board of India (SEBI).

Trading in Stock Markets

You can start trading in stock markets by following these simple steps:-

Open a Demat Account – You can open a Demat account with any bank or financial institution to begin trading in stock markets. Websites of all banks or financial institutions providing Demat Account services will give you information on how to open a Demat account. Bajaj Financial Securities Limited (BFSL) Demat Account is a good option to consider as it charges a flat brokerage rate per trade and helps you save big on brokerage costs.

Understand Stock Quotes – A stock quote is the stock price quoted by the stock exchange. It provides information on bid and ask price, traded volume, and last traded stock price.

Understand Bids and Asks – Bid price is the maximum price you are willing to pay for a stock and ask price is the minimum price at which you wish to sell your stock.

Select stocks after doing fundamental and technical analysis – Fundamental analysis is a method of deriving the intrinsic or fair value of a stock after considering economic factors affecting a company and its financials. Technical analysis uses historical data or price patterns to forecast stock price movements.

Take expert advice – Take the help of a financial advisor who will help you make informed decisions on stock selection as per your risk appetite and expected returns.

Always begin with safer stocks – If you are inexperienced in stock trading, begin with the least volatile stocks. Usually, ‘A’ graded or stocks of blue-chip companies are less risky.

Benefits of Investing in the Stock Market

High liquidity: The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the main stock exchanges in India. The average trading volumes are high in both these exchanges as most companies trade on either one or both of them. Hence, your liquidity needs are met.

Diversification: The stock markets provide investors with a broad range of financial instruments to invest in. A well-diversified investment portfolio minimizes losses for investors.

Higher gains in shorter periods of time: Compared to other financial instruments, stocks enable investors to earn higher returns in a relatively shorter time-frame.

Ownership and voting rights: Equity shareholders acquire ownership in proportion to their investment in a company stock and voting rights.

Bound by SEBI regulations: As a stockholder, your interests and rights are protected by the regulatory framework designed by SEBI.

Convenience: Technology advancements enable you to invest in stocks with a click of the mouse. Stock markets facilitate intra-day trading. Intra-day trading means all open positions are squared off at the end of the day so that ownership of shares remains intact.

Risks of Investing in Stocks

Market risk: Risk that arises due to daily stock price fluctuations.

Business or liquidity risk: Risk that arises due to a business going kaput or suffering losses. So if you have stocks of such companies you are likely to suffer losses.