Investing in the stock market means buying securities that may increase in value, with an aim to grow your wealth over the long term.
You can invest in different types of securities in the Indian stock markets, such as:
- Shares of listed companies
- Exchange-Traded Funds (ETFs), which track indices, commodities, or sectors and are traded like stocks
- Debt securities like corporate and government bonds
- Precious metals and commodities like gold, silver, crude oil, and more
- Currencies like the Indian Rupee, U.S. Dollar, and others
- Real estate investments through Real Estate Investment Trusts (REITs) or in infrastructure investment projects through Infrastructure Investment Trust (InvIT)
When investing in shares of listed companies, you buy ownership in that company. By holding them, you become a part-owner of the business. As the company performs well, the value of its shares goes up, and your investments follow.
You can invest in a company in multiple ways. You can either apply for a company's IPO, buy its shares after it has been listed, or buy units of a mutual fund that invests in the company of your choice.
How does investing in the stock market work?
When investing in stocks:
- You pick a company whose stock you want to buy.
- You go to a broker's app or platform (like Kite) and search for the company.
- You place a buy order and pay for it.
- The shares get added to your demat account.
You can track how your shares are performing and decide whether to hold them for the long term or sell them when the price goes up.
For example, say you buy 10 shares at ₹2,000 each, worth ₹20,000. If the company announces great quarterly results and the stock price rises to ₹2,100, your total investment is now worth ₹21,000. That is a profit of ₹1,000.
The opposite could also happen. If the stock price falls to ₹1,900, the value of your investment drops to ₹19,000, and you lose ₹1,000.
Investing requires patience. In the long term, the goal is for your portfolio to grow as the companies you invest in perform better.
Benefits of investing in the stock market
- Protects your money from inflation: Inflation reduces the value of your savings over time. Investing helps your money grow and keep up with inflation.
- Helps achieve financial goals: Whether it's buying a house, planning a wedding, or retiring early, investing can help you reach your goals faster.
- Tax benefits: Investments in securities like ELSS funds or the Public Provident Fund (PPF) can give you tax benefits under Section 80C of the Income Tax Act.
- Creates wealth over time: With compounding and time on your side, your investments can grow exponentially.
Risks involved in investing in the stock market
- Market volatility: The prices of the shares you invest in fluctuate daily. If the market moves against you, your portfolio's value could drop.
- Liquidity risk: Sometimes, the shares in your portfolio might not have enough buyers, making it harder to sell them when you want to. This can usually happen with smaller or less popular companies.
- Company performance: If the company you've invested in doesn't perform well, its stock value might decline.
- Interest rate fluctuations: For bonds, changes in interest rates can directly impact their value.
The key to managing these risks is diversification. Investors can spread their investments across different sectors and securities to minimise the impact of any one loss.