Basics of Investment : Stock Market and Cryptocurrency

I have done my B.Tech. from VIT University, Vellore Campus in Electronics and Communication Engineering with Specialization in Internet of Things and Sensors (2021 batch). With this article, I hope to provide the readers with a basic understanding of the stock market & cryptocurrency.

What is Investing and why Should we Start it at a Young Age :

Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit. The basic objective here is to create wealth for the future. The most common types of investments are stocks, funds, bonds, commodities, derivatives etc. No age is too young to invest, and no amount is too little to invest. By investing at an early stage of life, we learn a pattern of financial independence and discipline and this improves our spending habits. At a young age we have a larger risk taking ability due to lesser financial responsibilities. Also, since the investment tenure is longer the periodic investments can be small.

What is the Stock Market :

Stock market is an exchange which allows us to buy or sell stocks. Buying or selling stock means buying or selling shares or pieces of a particular company. Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Almost all the major firms in India are listed on either the NSE or BSE. ‘Listed’ is a term used to describe a firm that is included on a stock exchange so that it’s shares can be traded. The normal stock trading (buying or selling) timings in India are from 9:15 am to 3:30 pm from Monday to Friday, excluding government holidays.

Some Terms Related to the Stock Market :

1. Shares - Pieces of a particular company.

2. Broker - The person who buys or sells stocks for you in exchange for a commission.

3. Demat Account - Demat account enables us to hold company shares in electronic format. We need to open an account before we can invest in the stock market. Demat accounts can be opened easily online. We need a PAN card, AADHAR card linked to a mobile number and bank statement (to link the demat account to your bank account) to open a demat account. I suggest beginners to open a demat account at Zerodha as they charge a relatively low maintenance fee and commission.

4. Portfolio - Portfolio is the collection of investments an investor has made.

5. Mutual Funds - Here the money pooled from investors is invested by a professional fund manager in stocks, bonds and various other assets in exchange  for a commission. The mutual funds are professionally managed based on thorough research and hence are great for long term investments.

6. Annual and Quarterly Reports - These are the reports prepared by companies which contain the balance sheet, statement of profit or loss and details of the past performance & future prospects of the company.

Diversification, Technical Analysis and Fundamental Analysis : 

1. Diversification - Diversification is a technique that reduces the risk by allocating investments across various financial instruments, industries, and other categories. It aims to minimize risks and maximize returns by investing in different areas that would each react differently to the same event. For example, if we allocate the majority of our funds in buying shares of companies in a single sector we would become overdependent on that particular sector. A slump in that sector would be disastrous for us. Diversification ensures that we don’t “put all of our eggs in a single basket” and is key for successful long term investing.

2. Technical Analysis - Technical analysis attempts to evaluate investment opportunities based on past prices and trends of a share. Technical analysts believe that the past trading activity and price changes of a share can be indicators of its future price. Technical analysis is often used to generate short-term trading signals. You can get resources to study technical analysis in detail for free at Technical Analysis by Zerodha Varsity. Feel free to contact me for additional resources.

3. Fundamental Analysis - Fundamental analysis is a method of determining a stock's real or "fair market" value. Fundamental analysts search for stocks that are currently trading at prices that are higher or lower than their real value. If the fair market value is higher than the market price, the stock is deemed to be undervalued and a buy recommendation is given. Fundamental analysis uses companies’ quarterly & annual reports and other data to determine a company's underlying value and potential for future growth. You can get resources to study fundamental analysis in detail for free at Fundamental Analysis by Zerodha Varsity. Feel free to contact me for additional resources.

Some Good Companies to Invest in for Long Term :

I will finish this section by giving a list of companies who I believe offer a great investment opportunity as of 8th June 2021.

1. TCS

2. Infosys

3. HDFC Ltd

4. SBI

5. Powergrid

6. Reliance Industries

7. Aurobindo Pharma

8. Tata Chemicals

9. Larsen and Toubro

10. SBI/HDFC/Nippon ETF Sensex

What is Cryptocurrency :

A cryptocurrency is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions. It is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the goods or services that the company provides. Central to the appeal and functionality of cryptocurrencies is blockchain technology, which is used to keep an online ledger of all the transactions that have ever been conducted, thus providing a data structure for this ledger which makes it nearly impossible to counterfeit or double-spend. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving prices skyward.

Cryptocurrency as an investment :

Cryptocurrencies are not backed by any real assets or tangible securities and are suitable only for aggressive investors who understand the risks involved with the investment. It's similar to investing in penny stocks, which may give extremely high returns in a short time, or you could lose the entire amount invested in them. Cryptocurrency markets are extremely volatile and it is advisable to invest the portion of the money which you can afford to lose entirely in cryptocurrency. You can create an account on CoinSwitch Kuber if you want to invest in cryptocurrency.

Note : All this has been written from the author’s personal experience. You can contact the author for any feedback, doubts, suggestions and for getting some extra resources at his Instagram handle.