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 49: Basic Stock Market Concept
1. What Exactly is
the Difference Between a Demat Account and a Trading Account?
Think of these as two essential but distinct tools for modern stock
investing:
𝗗𝗲𝗺𝗮𝘁 𝗔𝗰𝗰𝗼𝘂𝗻𝘁 (𝗗𝗲𝗺𝗮𝘁𝗲𝗿𝗶𝗮𝗹𝗶𝘇𝗲𝗱 𝗔𝗰𝗰𝗼𝘂𝗻𝘁):
This is your digital holding vault. It securely stores the shares,
bonds, mutual fund units, ETFs, etc., that you buy in electronic format,
replacing physical share certificates. It's like your bank locker for
securities.
𝗧𝗿𝗮𝗱𝗶𝗻𝗴 𝗔𝗰𝗰𝗼𝘂𝗻𝘁 : This is your
transaction platform. It's the interface provided by your broker through which
you actually place buy and sell orders for stocks and other securities listed
on the stock exchanges (like NSE, BSE). It connects you to the market.
You need both linked to your bank account to buy or sell shares. When
you buy, money moves from your bank to the exchange via the trading account,
and shares are credited to your Demat. When you sell, shares move from your
Demat to the exchange, and money is credited to your bank.
2. What do People
Mean by Fundamental Analysis vs. Technical Analysis?
These are two primary methods investors use to evaluate stocks:
𝗙𝘂𝗻𝗱𝗮𝗺𝗲𝗻𝘁𝗮𝗹 𝗔𝗻𝗮𝗹𝘆𝘀𝗶𝘀 (𝗙𝗔):Focuses on a company's intrinsic value. Analysts study financial
statements (profit/loss, balance sheet, cash flow), management quality,
competitive advantages, industry health, and overall economic factors. The goal
is to determine if a stock is undervalued (good buy) or overvalued (sell/avoid)
based on its actual business performance and long-term prospects. It's like
assessing a company's health and potential.
𝗧𝗲𝗰𝗵𝗻𝗶𝗰𝗮𝗹 𝗔𝗻𝗮𝗹𝘆𝘀𝗶𝘀 (𝗧𝗔): Focuses on studying historical price charts and trading volume to
identify patterns and trends. Technical analysts believe past price movements
can predict future direction. They use indicators (like moving averages, RSI,
MACD) and chart patterns (head & shoulders, support/resistance levels) to
time their entry and exit points. It's more about understanding market
psychology and supply/demand reflected in the price action itself. FA asks
*what* to buy, TA often asks *when* to buy/sell.
3. What is an IPO,
and why do Companies go Public?
An IPO, or Initial Public Offering, is the first time a privately owned
company sells its shares to the public on a stock exchange, becoming a publicly
traded company.
Companies pursue IPOs for key reasons:
Raise
Capital: The primary reason. Selling shares generates significant funds for
expansion (new factories, R&D, acquisitions), paying off debt, or funding
growth initiatives without taking on more loans.
Provide Liquidity: It allows early
investors (founders, venture capitalists, employees with stock options) to sell
their shares and realize gains.
Enhance Profile
& Credibility: Being listed increases a company's visibility, prestige, and
credibility with customers, partners, and lenders. It can also be used as
currency for acquisitions (using shares to buy other companies).
4. Why is Bitcoin Considered
so Volatile Compared to Stocks?
Bitcoin experiences extreme price swings due to several unique factors:
Relative Immaturity & Speculation: As a much newer asset class
(compared to centuries-old stock markets), Bitcoin lacks deep historical data
and established valuation models. Its price is heavily driven by speculative
sentiment, hype cycles (FOMO - Fear Of Missing Out), and media attention.
Regulatory Uncertainty: Government regulations regarding crypto currencies
are still evolving globally. News about potential bans, restrictions, or
endorsements can trigger massive price surges or crashes.
Lower Liquidity & Market Manipulation: While large, the overall
crypto market is still smaller than major stock markets. This can make prices
more susceptible to large trades ("whales") or coordinated
manipulation attempts. Limited intrinsic value perception (unlike stocks backed
by company assets/earnings) also contributes to volatility based purely on
supply and demand shifts.
5. How do Stock
Market Dividends Work?
Dividends are a portion of a company's profits distributed to its
shareholders. When a company earns a profit, it can either reinvest it back
into the business (for growth) or distribute it to shareholders as a
dividend.
Dividends are usually paid quarterly or annually per share owned. For
example, if a company declares a ₹10 dividend per share and you own 50 shares,
you receive ₹500. Payments are credited directly to your linked bank account.
Not all companies pay dividends—growth-focused firms (e.g., start-ups) often
reinvest profits, while established companies (e.g., FMCG, utilities) are more
likely to reward shareholders with consistent dividends.
6.
How do I Research a Company before Investing?
Focus on two key areas:
1. Financial Health: Study quarterly/annual reports. Look for consistent
revenue/profit growth, low debt (Debt/Equity ratio <1), strong cash flow,
and high return on equity (ROE >15%).
2. Business Model & Management: Is the company’s product/service in
demand? Does it have a competitive edge (e.g., brand loyalty, patents)? Assess
management quality via track record and transparency.
Use free resources like Screener.in, Moneycontrol, or annual reports on
BSE/NSE. Avoid hot tips-base decisions on data.
7. What is Asset
Allocation, and why does it Matter?
Asset allocation is spreading investments across different categories
like stocks, bonds, gold, and real estate based on your goals, risk tolerance,
and timeline.
It matters because different assets perform differently under different
economic conditions. Stocks may fall during inflation, but gold often rises. A
balanced allocation (e.g., 60% stocks, 30% bonds, 10% gold) reduces portfolio
volatility. For young investors, a higher equity allocation is common, retired
people should prioritize bonds for stability.
8. How do I Avoid
Investment Scams?
Follow these
rules:
Verify Regulators: Only use
SEBI-registered brokers (check SEBI website) and AMFI-registered mutual
funds.
Avoid Guaranteed
Returns: Legitimate investments never promise fixed high returns (e.g., "𝗺𝗮𝗸𝗲 𝗱𝗼𝘂𝗯𝗹𝗲 𝘆𝗼𝘂𝗿 𝗺𝗼𝗻𝗲𝘆 𝗶𝗻 𝟲 𝗺𝗼𝗻𝘁𝗵𝘀").
Research: If an offer sounds
too good to be true (e.g., WhatsApp stock tips, telegram tips etc.), it likely
is. Stick to trusted platforms (Zerodha, Groww, established AMCs).
9. What does “Market
Capitalization” mean?
Market Cap (or 𝗺𝗮𝗿𝗸𝗲𝘁 𝗰𝗮𝗽𝗶𝘁𝗮𝗹𝗶𝘇𝗮𝘁𝗶𝗼𝗻) is the total
market value of a company’s
Outstanding shares.
Calculate it
as:
𝗖𝘂𝗿𝗿𝗲𝗻𝘁 𝗦𝗵𝗮𝗿𝗲 𝗣𝗿𝗶𝗰𝗲 × 𝗧𝗼𝘁𝗮𝗹 𝗦𝗵𝗮𝗿𝗲𝘀 𝗢𝘂𝘁𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴
It categorizes companies:
Large-Cap: Established giants
(e.g., TCS, Infosys). Lower risk, stable returns.
Mid-Cap: Growing firms
(e.g., Tata Chemicals). Moderate risk/reward.
Small-Cap: Emerging
companies. High growth potential but volatile.
10. What is the
Biggest Mistake Beginners make?
Trying to time the market and waiting for a perfect dip to buy or
selling in panic during crashes. Studies show even professionals fail at timing
consistently.
Why it hurts:
Missing rallies while sitting on
cash.
Locking losses by selling
low.
Overtrading (increasing costs &
stress).
How to fix it:
·
Adopt SIPs or Systematic Investment Plan. Automate buying at all
levels.
·
Stay invested for 5+ years.
·
Rebalance annually (sell high/buy low mechanically).
"Time in the market beats timing the market."
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 – 48
