Hello readers, we are happy to announce that our
team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A For Stock
Market Newbies”, to spread the basic stock market knowledge to the
beginners.
This is your go-to resource for demystifying
the stock market from the scratch. Each day, we will present 10 carefully
curated questions with answers that will cover essential concepts, strategies,
and terminologies. Whether you have just entered into the market, or trying to
starting your stock market journey, or looking to strengthen your foundation,
our weekly post will guide you through the basics and beyond, making investing
accessible and understandable for everyone. Happy reading.
Day 5: Basic Stock Market
Concepts
1. What is a Capital Gain?
Capital gain is a
financial term. A capital gain is the amount of profit earned from the sale of
a capital asset, such as households assets, furnitures, some intangible assets,
investments in stocks and bonds etc. When the selling price exceeds the
purchase price, that difference is the actual amount of capital gain. Suppose,
Jojo buys 100 shares at Rs.10 each and he sells those 100 shares at Rs.20 each. His
capital gain will be Rs.2000 (100×Rs.20) - Rs.1000(100×Rs.10)= Rs.1000.Capital
gains can be classified as short-term (held for less than one year ) or
long-term (held for more than one year), with different tax implications.
2. What is a Capital Loss?
A capital loss occurs
when an asset is sold for less than its purchase price. Suppose, Mr. Samuel
buys 100 shares at Rs.20 each and sells those 100 shares at Rs.15 each. Then
his capital loss will be Rs.2000 (100×20)-Rs.1500 (100×15)=Rs.500.Capital
losses can be used to offset capital gains for tax purposes, reducing the
overall tax liability.
3. What is the
Difference between Stocks and Bonds?
The basic difference
between stocks and bonds is the nature of capital we use to invest in the
security. Stocks represent ownership in a company and come with potential for
capital gains and dividends. Bonds are debt securities issued by companies or
governments, where investors lend money in exchange for periodic interest
payments and the return of the principal amount at maturity. Stocks have higher
risks and returns potential than bonds.
4. What is The Time Value of Money?
The time value of money is the
concept that a dollar today is worth more than a dollar in the future due to
its potential earning capacity. The amount of money which we invest today for
financial returns will reduce the value of the same amount of money due to
the impact of inflation. This principle underlies investment decisions,
discounting future cash flows to present value.
5. What is Compounding in Investing?
Compounding in investing is the
process of earning returns on both your original investment and on the
accumulated returns from prior periods. Over time, compounding can
significantly increase the value of an investment as per compounding formula.
Compounding is a powerful concept in investing.
6. What is a Risk Tolerance?
Risk tolerance is an investor's
ability and willingness to endure potential financial loss in pursuit of higher
returns. It varies based on factors such as investment goals, time horizon, and
financial situation, and size of portfolio invested.
7. What is Rebalancing a Portfolio?
Rebalancing a portfolio involves
adjusting the proportions of different assets in your investment portfolio to
maintain your desired level of risk and return. This often means selling assets
that have performed well and buying those that haven’t to return to your
original asset allocation. You may need to rebalance your portfolio
periodically as in the market we often see that the value of asset class
changes in future due to variable returns on investments.
8. What is the Difference between Active
and Passive Investing?
Active investing involves selecting
individual stocks or other assets with the goal of outperforming the market to
beat the average market returns. Passive investing involves buying a
diversified portfolio, often through index funds, to match the performance of a
market index, with lower fees and less frequent trading.
9. What is a Bull Trap?
A bull trap happens when a stock or
market shows signs of a potential uptrend during a downtrend encouraging
investors to buy in. However, the market then reverses downward, trapping
bullish investors in a losing position.
10. What is a Bear Trap?
A bear trap occurs when a stock or
market appears to be in a downtrend, leading investors to believe prices will
continue falling. However, the market reverses, afterwards trapping short
sellers and leading to potential losses.
If you have any other questions in your mind relating to stock market basics or need any clarification, please put your query into the comment box, We will try our best to clarify the same
Disclaimer: The information provided on MoneyWiseMind is for
educational and informational purposes only. It is not intended to be financial
advice, and you should not rely on it as such. Before making any financial
decisions, you should consult a licensed financial advisor.
𝐈𝐧𝐯𝐞𝐬𝐭𝐢𝐧𝐠 𝐈𝐧𝐬𝐢𝐠𝐡𝐭𝐬: Last Week's Topic
Weekly Q&A For Stock Market Newbies: Part - 4
