Hello! Today I am back with another article for you related to investments. In this article, we will make it simple for beginners who want to enter stock market. This article would be a beginner's guide for you.
So, the first basic question is, what by investment? and what does it mean? The simple answer is-
Investing is a mode of putting your money into some work now and earning extra money later over time. When you are busy with your own job, your investments are earning more money for you. Put your money now and enjoy more money over time, this is called investing. The prime motive of investing is to engaging your money in one or more investment types and hoping increase of money over time.
We can assume that you have some extra money and you want to invest the extra money. In the following article, try to understand the beginner's process to start investing. And also, try to understand how to increase your investment returns while minimizing the expenditure.
Which Type of Investor You Are ?
Before investing your money, decide that which type of investment will be beneficial for you. When you reach any online stock broker, they will ask you about your interests, your investment goals and, how much risk you can take in investments. When I decided to start investing, I also gone through the same questions. At that time you should think wisely, search for solutions of all the queries in your mind, then decide your investment type.
I have seen some active investors who check performance of their investment time to time, while some invest the money and don't look it back for long time. Some traditional online stock brokers provide you many options to invest your money. You can invest your money in stocks, Index Funds, Mutual Funds, Exchange Traded Funds (ETF's) and bonds.
There are two types of online brokers available in the market. They are as follows :
1) Full-service Brokers:
As per the name, full service brokers provide a wide range of traditional brokerage services including services related to money, and financial advices related to retirement and healthcare. As per their services, full service brokers only deal with wealthy clients. They charge their fees according to investment of the client. These fees can be a fixed percentage of total investment amount, a fixed percentage of transaction made and annual membership fees. In short, they charge high fees from their clients. And to justify their fees, they provide in detail help and advice according to needs of client.
2) Discount Brokers:
Some years ago, discount brokers were the exceptions of online brokerage. But today, they are the ideals of the market. Online discount brokers make some tools available for you, so that you can choose and make your own investments. They may also serve a "set it and forget it" type advisory service. Now, in the 21st century, financial services undergone high progress. Hence, due to this huge progress, online brokers are also adding more learning material and more new features to their websites and mobile apps.
Apart from that, some discount brokers don't have minimum deposit amount restrictions, only for few months of account opening. But, you may face other issues, certain amount is charged as penalty for not maintaining minimum deposit amount. If you are willing to invest in stocks, I would suggest that you should keep the above things in mind.
After the 2008 Financial Crisis, a new fresh type of investment advisor was born, called as Machine advisor. As per the name, machine advisors are the digital online advice platforms which provides advices based on statistical data, mathematical data and machine algorithms. They do not require much human interference.
According to changing time and changing technology, financial advisory services also improved. Many new online brokerage companies were founded with machine advisory services. Even some of the well recognized and well established companies also improved themselves and added machine advisory services. According to a survey report, machine advisors will grow tremendously in some upcoming years. If your goal is to make money for long term, you can do even better with the help of machine advisors.
Minimum Requirements for Account:
A dematerialized account requires your tax information, few proofs that conform your identity and your address. Brokerage institutions do not open a zero-balance account. They require a minimum deposit amount to process your account.
Before opening a dematerialized account, decide where to open the account. I will say that do some market research about all brokerage institutions, check their market reviews, check their brokerage fees and other charges, take advices from some other investors. In some of the institutions, if you maintain your account balance above a fixed line, other expenses like annual account maintenance charges and trading charges costs lower. Some institutions offer you zero commission trades till a certain period, if you open your account at their firm.
Fees and Commissions:
As the time is changing, market competition is also increasing. Due to this competition, many brokerage firms in the market are reducing their commission on trades. Each and every dematerialized account holder who has maintained the minimum balance on their account can invest in the market. Therefore, brokerage firms implement various new ideas to earn money from their clients.
Whenever you make a transaction through your account, either you buy stock or sell stock, your stock broker takes a commission on each transaction. It happens in all cases. Each share broker has different trading fees. Firms that does not charge commission on trades make money from their clients in different ways.
As per my small experience in trading, I know that, your trading profitability depends on the frequency of your trades. The number of trades you make in a year also comes with the same number of transaction fees, so these charges also affect your profit margin. If you have a small amount available for investment, it can prove to be costly. Because the broker has a fixed commission and you have to pay it whenever you enter a trade or exit a trade.
In a trade, you can only buy or sell shares of a company. If you buy shares of more than one company at the same date and time, still it will not be counted one trade. Depending on the number of companies you have done business with, you will have to pay a trading fee.
Reduce risks by Diversification:
When making any investment, diversification is important. Suppose you have diversified your portfolio, and the performance of any one asset is not good. But you hope that other assets will definitely perform well and bring good returns. Now, if you invest all your money in a property and if that property does not perform well, then you will lose a lot. Therefore, a well diversified investment is always beneficial. Like if you keep all the mangoes in a basket and if one mango rot, then after some time all the mangoes in the basket will also get rotten.
Stock investing will cause the greatest difficulty in diversifying your investment. As I mentioned earlier, high investment in stocks can prove risky for your portfolio. For a good and diversified portfolio, you also need a high investment amount. You may not get a diversified investment with a low deposit amount. If you are a beginner and want to invest with less money, then start by investing in at least 2 companies.
At this stage, the main essential benefits of mutual funds (MFs) and exchange-traded funds (ETFs) come to light. Both these types of security funds have a large number of stocks and other investment options available. If you invest your money in one or both of the above security types, it will make your portfolio more diversified.