FAQs

FAQs

25 Frequently Asked Questions about Investing in less than 25 minutes-

 

 

  1. What is a stock?
    This is the most basic question in the stock market. If you don’t know the answer to this question, you’re not going to make any money.

Simply put a stock is ownership in a company. That’s it. You buy a stock; it means that you own a little piece of the company. You will make money if the company does well and you’ll lose money if the company fails.

Share, stock, stake, equity they all mean the same.

 

  1. Do all companies have stocks?

Yes, all public companies have shares which retail investors like you and I can buy. Private companies have shares only in the hands of a few people.

 

  1. What is the stock market?

Just like there is a place for buying and selling vegetables, there is a place for buying and selling stocks. That place is called a stock market.

 

  1. Do I need to go somewhere to buy stocks?

No, just like you can buy vegetables online on your phone, you can buy stocks too on your phone.

 

  1. Where is the stock market located?

The Indian stock market is located on Dalal Street, Mumbai.

 

  1. What is NSE and BSE?

These are two terms that stand for National Stock Exchange and Bombay Stock Exchange. One can buy/sell shares through these mediums. Each consists of 1500 and 7000 companies respectively.

 

  1. What is SENSEX and NIFTY?

Sensex stands for Sensitive Index and Nifty stands for National Fifty. These are the two stock indices. They include they top 30 and the top 50 companies in the country respectively.

Countries like USA and UK also have stock indices like DJIA, FTSE, NYSE.

 

  1. How old do I have to be do trade stocks?

The legal age is 18 in India. But you can use your parents account to trade if you’re younger.

 

9.What are the timings of the stock market?

The Indian stock market opens at 9.15 am and closes at 3.30 pm from Monday to Friday excluding some major holidays.

 

  1. Can I buy/sell shares before or after the market opens/closes?

No, but you can place an order for that which will be executed by your broker.

 

  1. How much does it cost to get started?

There’s no number. You can start with even 100rs. But I recommend starting with 5-10k rupees.

 

  1. How long can I hold stocks for?

Forever (unless you’ve used margin). You can sell the stocks whenever you want.

 

  1. What do I need to buy/sell shares?

Three things- 1.a bank account. 2. A demat account and 3. A trading account.

 

  1. What is a Demat account?

Demat stands for Dematerialisation account. It is like a shopping cart. Just like a shopping cart helps your store your groceries, a Demat account helps you store your shares.

 

  1. What is a trading account?

A trading account is an account for buying your shares or selling them. Most banks provide 3 in 1 accounts where in you’ll be provided with all the three accounts. Some discount broking houses provide with only trading and a Demat account.

 

  1. Why do stock prices fluctuate?

Demand and Supply. When a company does well and more people want to buy its shares, the price goes up. If the company performs poorly or does some fraud, the stock price goes down as people start selling their shares.

 

  1. What is leverage (margin)?

Think of the time when you’re buying a house worth 50 lacs. You don’t put in all upfront, rather you just pay 5-10 lacs and pay the rest later.

Similarly, leverage allows you to buy more shares than what you can afford. If you use 10x leverage on 10,000 rupees, you can buy 1,00,000 worth of shares but you have to return them by the end of the day.

Leverage increases your purchasing power. It increases your profit as well as your loss.

Example- If you buy 1000 shares worth 100 rupees using 10k capital with 10x leverage, and the stock goes up 1 rupee by the end of the day, you make 1k rupees. That is 10% profit on your 10k capital. But if the stock falls just 1 rupee, you lose 1k i.e. 10% of your capital. Use leverage carefully.

 

  1. What are dividends?

Whenever a company makes a profit, it has 2 options to either use profits for further growth/acquisitions or to distribute it amongst it’s shareholders.

If the company announces 5 rupees’ dividend, it means each person will get 5 rupees for every share they own. Not all companies give dividends. It is totally up to the company to give dividends.

 

  1. Why do people buy stocks for dividends?

You may think that if you only get 5 rupees’ dividend, why bother? The reason is simple. Big players own many shares. If you own 1,00,000 shares of a company, you don’t care about the stock price because you get 500k worth of dividends every quarter/yr.

 

19.What is liquidity?

The ability to convert asset into cash is called liquidity. If you have a house, and you want to sell it, you’ll have to wait a long time before someone buys it.

But if you have a stock, just click on sell button and in 2 days you’ll get your money.

 

  1. What is volume?

The number of shares traded is called volume. A stock with a daily volume of 50 is extremely illiquid. You cannot sell a lot of shares without hampering the price.

But major companies like Reliance and Tata have millions of shares traded each day. You can easily sell your shares.

 

  1. What is market capitalization?

The number of outstanding shares multiplied by the stock prices gives out market cap. You must have seen that value of Apple was once 1 trillion dollars. It meant that the market cap was 1 trillion. It changes every day.

 

  1. What are the types of companies?

Based on market cap, there are 3 types of companies.

Small cap. The market cap of these companies is 500-5000 crores.

  1. Mid cap. The market cap of these companies is 5000-20000 crores.
  2. Large cap. Any company with market cap of over 20k cr is large cap.

 

  1. What are penny stocks?

Penny stocks aka pink sheets are small companies which have a very low market cap and hence cannot be traded on the main exchange.

 

  1. What is shorting?

Shorting a stock means selling a stock before you own it. You simply borrow stocks from your broker and buy them back at a lower price.

In simple terms shorting means making money when the stock price falls. In India you can only short a stock on intraday basis. For delivery you can use futures and options.

 

  1. What is hedging?

A popular method to secure your capital. Here let’s say you buy 2000 reliance ind. Shares and you think the stock might fall. So you short another 2000 reliance shares in FnO till the stock falls and rises up. Basically you make no profit but you avoid loss.

Continuous transactions are expensive and you don’t get tax benefits so it adds up the cost. Hedging helps avoid all that.

 

  1. How to know which stocks to buy?

Two method –

  1. Technical analysis
  2. Fundamental Analysis
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