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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 76:STOCK MARKET BASICS
𝙒𝙝𝙖𝙩 𝙞𝙨 𝙩𝙝𝙚 𝙙𝙞𝙛𝙛𝙚𝙧𝙚𝙣𝙘𝙚 𝙗𝙚𝙩𝙬𝙚𝙚𝙣 𝙖𝙣 𝙖𝙘𝙩𝙞𝙫𝙚 𝙖𝙣𝙙 𝙖 𝙥𝙖𝙨𝙨𝙞𝙫𝙚 𝙞𝙣𝙫𝙚𝙨𝙩𝙢𝙚𝙣𝙩 𝙛𝙪𝙣𝙙?
An active fund has a manager who tries to pick winning stocks to "beat the market." A passive fund (like an index fund) simply tracks a market index (like the S&P 500). The key difference for you is cost and performance. Active funds charge much higher fees for their management, and the vast majority fail to outperform their benchmark index over the long term. For beginners, low-cost passive index funds are the most reliable and efficient way to capture overall market growth.
𝙒𝙝𝙖𝙩 𝙞𝙨 "𝙧𝙚𝙗𝙖𝙡𝙖𝙣𝙘𝙞𝙣𝙜" 𝙢𝙮 𝙥𝙤𝙧𝙩𝙛𝙤𝙡𝙞𝙤, 𝙖𝙣𝙙 𝙝𝙤𝙬 𝙙𝙤 𝙄 𝙙𝙤 𝙞𝙩?
Rebalancing is the process of realigning your portfolio back to your original target allocation (e.g., 80% stocks, 20% bonds). Over time, some investments grow faster than others, shifting your risk profile. To rebalance, you simply sell a portion of your "winners" (the over-weighted asset) and use the proceeds to buy more of your "losers" (the under-weighted asset). This forces you to "sell high and buy low" and maintains your desired level of risk. Doing this once a year is a common practice.
𝙎𝙝𝙤𝙪𝙡𝙙 𝙄 𝙞𝙣𝙫𝙚𝙨𝙩 𝙞𝙣 𝙖 𝙏𝙧𝙖𝙙𝙞𝙩𝙞𝙤𝙣𝙖𝙡 𝙄𝙍𝘼 𝙤𝙧 𝙖 𝙍𝙤𝙩𝙝 𝙄𝙍𝘼?
The choice hinges on your current vs. future tax situation. With a Traditional IRA, you contribute pre-tax money (getting a tax deduction now) and pay taxes when you withdraw in retirement. With a Roth IRA, you contribute after-tax money (no deduction now) and enjoy tax-free growth and withdrawals in retirement. A simple rule of thumb: if you believe your tax rate will be higher in retirement, choose the Roth IRA. If you expect it to be lower, choose the Traditional.
𝙒𝙝𝙖𝙩 𝙞𝙨 "𝙙𝙤𝙡𝙡𝙖𝙧-𝙘𝙤𝙨𝙩 𝙖𝙫𝙚𝙧𝙖𝙜𝙞𝙣𝙜" 𝙖𝙣𝙙 𝙬𝙝𝙮 𝙞𝙨 𝙞𝙩 𝙖 𝙗𝙚𝙜𝙞𝙣𝙣𝙚𝙧'𝙨 𝙗𝙚𝙨𝙩 𝙛𝙧𝙞𝙚𝙣𝙙?
Dollar-cost averaging (DCA) is the strategy of investing a fixed amount of money at regular intervals (like $500 every month), regardless of the share price. It’s a beginner's best friend because it removes emotion and guesswork. You buy more shares when prices are low and fewer when they are high, averaging out your cost over time. This automates the process and prevents you from making the common mistake of investing a large lump sum right before a market peak.
𝙃𝙤𝙬 𝙘𝙖𝙣 𝙄 𝙚𝙫𝙖𝙡𝙪𝙖𝙩𝙚 𝙩𝙝𝙚 𝙧𝙞𝙨𝙠 𝙤𝙛 𝙖 𝙨𝙞𝙣𝙜𝙡𝙚 𝙨𝙩𝙤𝙘𝙠 𝙄'𝙢 𝙞𝙣𝙩𝙚𝙧𝙚𝙨𝙩𝙚𝙙 𝙞𝙣?
Beyond checking the P/E ratio, look at the company's beta and its competitive moat. Beta measures a stock's volatility relative to the overall market. A beta above 1.0 means it's more volatile (riskier) than the market. More importantly, assess the company's "moat"—its sustainable competitive advantage. Ask: Is this advantage easy for competitors to copy? A wide moat (strong brand, patents, network effect) can indicate lower long-term business risk, even if the stock price is volatile.
𝙒𝙝𝙖𝙩 𝙖𝙧𝙚 𝙗𝙤𝙣𝙙𝙨, 𝙖𝙣𝙙 𝙬𝙝𝙚𝙣 𝙨𝙝𝙤𝙪𝙡𝙙 𝙄 𝙖𝙙𝙙 𝙩𝙝𝙚𝙢 𝙩𝙤 𝙢𝙮 𝙥𝙤𝙧𝙩𝙛𝙤𝙡𝙞𝙤?
Bonds are essentially loans you make to a government or corporation in exchange for regular interest payments. They provide stability and income. You should add them to your portfolio as you get closer to a major financial goal (like retirement) or if you have a low tolerance for stock market swings. They act as a "shock absorber." A common guideline is to hold a percentage in bonds roughly equal to your age, but your personal timeline and comfort with risk are the real deciding factors.
𝙄 𝙝𝙚𝙖𝙧 𝙖𝙗𝙤𝙪𝙩 "𝙨𝙚𝙘𝙩𝙤𝙧𝙨 𝙒𝙝𝙖𝙩 𝙖𝙧𝙚 𝙩𝙝𝙚𝙮, 𝙖𝙣𝙙 𝙨𝙝𝙤𝙪𝙡𝙙 𝙄 𝙩𝙧𝙮 𝙩𝙤 𝙞𝙣𝙫𝙚𝙨𝙩 𝙞𝙣 𝙩𝙝𝙚 "𝙣𝙚𝙭𝙩 𝙝𝙤𝙩 𝙨𝙚𝙘𝙩𝙤𝙧"?
Sectors are broad categories of the economy, like Technology, Healthcare, Financials, or Energy. Trying to invest in the "next hot sector" is a form of sector speculation, which is very difficult even for professionals. For a beginner, a better approach is to own all sectors through a broad market index fund. This gives you diversified exposure. If you want to make a small, educated bet on a sector you understand well, limit it to a tiny portion (e.g., 5%) of your overall stock allocation.
𝙒𝙝𝙖𝙩 𝙞𝙨 𝙖𝙣 𝙀𝙏𝙁, 𝙖𝙣𝙙 𝙝𝙤𝙬 𝙞𝙨 𝙞𝙩 𝙙𝙞𝙛𝙛𝙚𝙧𝙚𝙣𝙩 𝙛𝙧𝙤𝙢 𝙖 𝙢𝙪𝙩𝙪𝙖𝙡 𝙛𝙪𝙣𝙙?
An Exchange-Traded Fund (ETF) and a mutual fund are both baskets of securities. The key differences are in trading and cost. ETFs trade like stocks on an exchange throughout the day, often have lower expense ratios, and are typically more tax-efficient. Mutual funds are priced once a day after markets close. For a beginner building a long-term portfolio, a low-cost, broad-market ETF is often the most flexible and cost-effective choice for getting started.
𝙒𝙝𝙖𝙩 𝙨𝙝𝙤𝙪𝙡𝙙 𝙄 𝙙𝙤 𝙬𝙝𝙚𝙣 𝙩𝙝𝙚 𝙣𝙚𝙬𝙨 𝙞𝙨 𝙛𝙪𝙡𝙡 𝙤𝙛 𝙨𝙘𝙖𝙧𝙮 𝙚𝙘𝙤𝙣𝙤𝙢𝙞𝙘 𝙝𝙚𝙖𝙙𝙡𝙞𝙣𝙚𝙨?
Your action plan should be: Review, Don't React. First, review your investment plan. Was it built for a 30-year horizon? If yes, short-term headlines are just noise. Second, check your asset allocation. If it's still aligned with your goal, do nothing. This is when your automated dollar-cost averaging is most valuable—it ensures you are buying when others are fearful. History shows that markets have recovered from every single downturn. Headlines are temporary; your long-term plan is permanent.
𝙄'𝙫𝙚 𝙢𝙖𝙙𝙚 𝙢𝙮 𝙛𝙞𝙧𝙨𝙩 𝙞𝙣𝙫𝙚𝙨𝙩𝙢𝙚𝙣𝙩𝙨. 𝙃𝙤𝙬 𝙙𝙤 𝙄 𝙩𝙧𝙖𝙘𝙠 𝙢𝙮 𝙥𝙤𝙧𝙩𝙛𝙤𝙡𝙞𝙤'𝙨 𝙥𝙚𝙧𝙛𝙤𝙧𝙢𝙖𝙣𝙘𝙚 𝙩𝙝𝙚 𝙧𝙞𝙜𝙝𝙩 𝙬𝙖𝙮?
The right way to track performance is to benchmark it against an appropriate index, not against a random stock tip or your friend's portfolio. If you own an Indian total stock market fund, compare its return to an index like the Nifty Total Market Index. This tells you if your fund is doing its job. Check your portfolio quarterly or semi-annually, not daily. Obsessing over daily fluctuations leads to bad decisions. Focus on the long-term trajectory and whether you are consistently adding to your investments.
