The first step in successful stock market investing is to Understand the stock exchange. This is a very crucial step in your investing journey. If you begin investing in the stock market without having a thorough or at least a great understanding of the stock exchange itself, you may suffer losses in the beginning. These first reductions may discourage you from lifelong from undertaking stock market investments. So, it is highly important that you start your journey being fully ready.
A stock market is basically a market to buy and sell stocks of those companies. It refers collectively to all stock exchanges, where the issuing and trading of stocks occur. The stock trading could be performed on the correct exchange platform or in an over-the-counter sector. The stock market is also referred to as the equity market. The stock exchange provides a company with a mechanism to acquire capital from investors instead of partial or fractional ownership.
The stock exchange has two main parts viz. primary market and secondary market. The new issues of the stocks are sold in the primary market by the company going public. The subsequent buying and selling of the stock, after it has been listed and marketed by the company, takes place in the secondary market.
Stock Exchanges Today
Stock exchanges have been established in most major financial Centers and cities across the world, such as New York, London, Hong Kong, Singapore, Tokyo, etc..
New York Stock Exchange (NYSE) and the NASDAQ are both the Largest stock exchanges in America. NYSE was founded in 1792. NYSE is the biggest stock exchange in the world in terms of market capitalization.
Stock Market Risks
There are a number of dangers associated with stock market investing. The volatility of the stock prices is among the most significant risks associated with investing in stocks. The rise and decline in a stock’s purchase price by 20 percent every day is not a matter of surprise.
Sometimes, there is a widespread decline or drop in the Costs of almost all the stocks. This situation is referred to as a stock exchange crash and is very painful to the stockholders. In the event of a stock exchange crash, the investors may not find any buyers for many of their stocks.
Regulators of the Stock Markets
The governments of different countries have established Regulators to track the stock exchanges’ activities to protect investors.
In America, the Securities and Exchange Commission (SEC) is The main regulator that tracks the U.S. stock markets. The SEC summarizes that its job is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
Stock Market Functionaries and Players
The stock exchange has a number of functionaries and players. They are stockbrokers, traders, portfolio managers, stock analysts, and investment bankers. They have different roles to play but are interrelated.
Stockbrokers buy and sell securities on behalf of the investors. Portfolio managers look after and manage the investments or stocks for their clients. Stock analysts research the stocks and rate them for buying and selling. Investment bankers work for the businesses for their IPOs, mergers, and acquisitions, etc.
One of the more powerful methods of investing in stocks is investing in mutual funds. Mutual funds also invest in stocks; however, they pool the investible funds of a high number of investors and then invest that collective pool of funds on the respective stocks. If there is any reduction in one particular stock, it is spread over a large number of investors, and consequently, the reduction to an individual investor is quite bearable. This is simply because of the large magnitude of the overall funds. Therein dwells the beauty of investing in stocks through mutual funds.
The benefit of diversification, which is not available to a Small investor in pure stock investing, becomes available to the smallest individual investor due to mutual funds. The mutual fund companies, also called asset management businesses, employ professionally qualified and experienced persons to control the investments. Their expertise and professional approach to stock investing serve the small investors very well; thus, mutual funds are an effective, efficient, and less risky way to invest in the stocks. However, mutual funds aren’t a totally risk-free way of investing. Mutual funds also include various fees and expenses. The investor must bear them ultimately.
Advantages of Mutual Funds
- Diversification: Mutual funds have well-diversified portfolios. They have a large number of stocks of numerous companies across many industries. This assists them in bearing the risk due to a sudden or large loss caused by a particular stock or industry. By spreading the investments throughout the spectrum of shares, businesses, or businesses, you can protect your investments in the days of wide swings or market changes. Mutual funds are a real-life application of an age-old maxim”Don’t put all your eggs in one basket.”
- Variety: The mutual funds, particularly the large and well established mutual funds, have a huge quantity of money for investing, and this means that they are able to invest in an array of assets and asset classes. By way of example, some mutual funds may invest in a mix of big caps and mid-caps. The big caps provide stability to the portfolio, while mid-caps offer the growth potential.
- Affordability: If investors want to build a well-diversified portfolio, they will require a huge investment amount. But, a small investor can also invest in a well-diversified portfolio through a mutual fund by investing in affordable sum money.
- Dividend: You can get some regular income through the dividend declared and distributed by the mutual fund.
- Liquidity: You can also redeem your mutual fund portfolio at the net asset value (NAV).
- Professional Expertise: Mutual funds are managed by people who have a great deal of financial expertise and experience. This makes it much easier for you to reap the benefits of smart investments.
Disadvantages of Mutual Funds
- Prices: You have to bear ultimately all the costs, fees, and charges associated with the operations of the mutual fund or the asset management company. This lowers the value of your mutual fund portfolio or the net asset value (NAV) as well as the returns. You have to bear these costs even if the mutual fund’s performance is negative, i.e. you have made losses together with the decline in the entire value of your mutual fund portfolio.
- Risk of Loss: You have all the risks related to stock investing when you invest in a mutual fund. You may lose a part or all of your money in mutual fund investment in case of market volatility.
- Performance: Though the mutual funds have a past performance and track record, it does not make sure that the future performance would be outstanding.
- Limited Potential: When markets are on the move with high growth in selected stocks or industries, you may not gain the full profit potential of investing in these particular stocks or industries. This is because your investments are in a diversified mutual fund.
- Deficiency of Guarantee: The mutual fund investments are not guaranteed by the government or by any other government agency such as the guarantee you have to your deposits from the bank in many countries e.g. guarantee of Federal Deposit Insurance Corporation (FDIC) in the united states.
You can decide on whether to invest your money in mutual Funds following the advantages and disadvantages of the mutual funds in your individual case, taking into account your investment objectives, size of the portfolio, risk appetite, etc.
There are various types of mutual funds where you can invest. Mutual funds have three main categories viz. stock funds or equity funds, bond funds, and money market funds. Each category of mutual funds has its own unique features, returns, and risks. The higher the return potential, the greater is the risk of loss.
There are some restrictions imposed on the mutual fund with respect to where and how much it can invest in different types of assets or stocks based on its category. However, these rules vary from country to country. In some countries, there are rules that call for a mutual fund to invest at least 80% of assets in the type of investments belonging to its announced category. You may have an idea of the exact type of investments from the mutual fund prospectus.
Money Market Mutual Funds: These are funds that invest in short-term Investments or securities issued by the authorities, or creditworthy top-level corporates. They are less volatile when compared with the other types of mutual funds. But, they have low returns too. The returns usually move in tandem with the short-term interest prices. They offer a fantastic alternative to keeping your money in cash in a bank account, as they offer you high liquidity, and you can take out your money very quickly.
Bond Mutual Funds: These are funds That invest in the bonds issued by the government and companies. They have higher risks than money market funds, but less risk than the stock or equity funds. The majority of the bond funds concentrate on higher yields. The bond fund’s earnings after expenses are referred to as bond yield, which mainly depends on bond quality and maturity.
These funds mainly face credit risk i.e., the risk that the counterparty viz. Bond issuing government entity or the company may fail to pay the coupon/interest or the principal amount. The credit risk depends on credit the quality of the bonds contained in the fund portfolio. These funds also face interest rate risk, and usually, the bond funds’ market value goes down when interest rates rise, particularly in the case of longer term-bonds. Usually, the lower the quality or the longer the bond’s maturity, the greater the yield and risk.
Stock or Equity Mutual Funds: These funds invest in the stocks of various companies. They have higher risks as compared to a money market or bond funds. They also have high volatility. The stock or equity mutual funds have performed better than other investments over the long term.
These funds mainly face market risk. The prices of stocks may fluctuate considerably. The prices may fluctuate due to many reasons, e.g. changes in the general economy, industry level happenings, individual company or stock level developments related to earnings, input costs, management, etc..
Stock or Equity Mutual Funds is a broad level category and include many sub-categories of mutual funds in it, such as:
- Growth Funds: focus on stocks with high growth potential.
- Income Funds: focus on stocks paying regular dividends.
- Sector Funds: focus on a particular industry or sector e.g., IT, telecom, etc..
- Index Funds: focus on a portfolio of shares replicating an Index to accomplish the same yield, e.g., S&P 500.
- Balanced Funds: focus on a portfolio with an optimum combination of both the stocks and bonds.
Buying and Selling of Mutual Funds
You may buy the shares of mutual funds in a number of ways. The most common way is buying from the fund itself or buying through a financial adviser.
The Purchase Price for mutual fund stocks is usually calculated on the basis of the per stock net asset value (NAV) of the mutual fund. Depending on a mutual fund, there may be a stockholder fee imposed at the buying time, such as sales load. The NAV of a mutual fund is calculated at the end of the specific business day by dividing the entire value of the mutual fund’s holdings after deduction of expenses by the total number of stocks owned by the mutual fund. Buyers of mutual funds buy at the NAV calculated after they place the buying order.
The stocks of mutual funds are redeemable i.e. the investor can sell the stocks back to the mutual fund at any point in time.
All said and done, mutual fund investing is a great and fantastic way to invest in stocks. There are a number of mutual funds with wide-ranging features, different types of portfolios, and investment philosophies. You may choose the one which best fits your unique needs and circumstances in terms of return objectives, risk tolerance, liquidity needs, etc..
It will give you a good opportunity to learn about inventory Investing if you continuously track your mutual fund portfolio’s performance and how it moves with the total stock markets in addition to the peer group of mutual funds.
Thus, you will start recognizing a pattern of price movements In the stocks with relation to the economic environment, the performance of the businesses and businesses, earnings, results of organizations, etc.. After a time, when you become well versed with all these stock investment related things, you may opt to take a dip into the wide ocean of stock investing on your own; and come out with flying colors.