The best ways to invest in the stock market for beginners
[Reading Time: 4 minutes]
If you’re starting your investing journey and are young, you would obviously want to invest in equity (equity basically means stocks/shares - it’s just a fancy term).
And yes, if you’re young, that’s the best way to go about with your investment journey. But everyone says it’s full of risk; it gives more losses than profits; it’s a gamble; blah blah blah.
That isn’t true. Yes, the stock market is risky. But if done well, it gives good returns, and it definitely isn’t a gamble!
But the problem is, if you’re starting out, there is a high chance that you wouldn’t know about Technical Analysis and/or Fundamental Analysis. So then how will you decide which company stock to invest in?
Don’t worry, this article is just for you! Today I’m going to talk about the 2 best ways to invest in the stock market: Mutual Funds and Smallcase.
The most basic way is to go the tried and tested route - invest in an equity Mutual Fund (if you’re aware of how equity funds work, you can skip the next three paragraphs and straight read about smallcase)
An equity Mutual Fund basically takes money from thousands of investors like you and me, pools in all the money, and then invests that money to buy shares of multiple companies. You will purchase “Units” of the Mutual Fund, at a price called the “NAV”. Now, if the companies which this Mutual Fund has invested in, are doing well, their share price will increase, which will means your Mutual Fund’s NAV will increase. If you want to make a profit, you can sell your Mutual Fund at the current NAV (which will be higher than the NAV you bought it for, hence making you a profit).
Now, there are various categories of Mutual Funds depending on your risk appetite - large cap funds, focused funds, small cap funds, multi-cap funds, flexi cap funds etc. We won’t get into the details right now. If you have any questions, feel free to reach out to me on LinkedIn or simply reply to this e-mail.
To explain in brief, depending on your risk appetite, you can invest in any equity Mutual Fund which in turn invests in companies that give good returns. This way, you’re indirectly investing in stocks of multiple companies, and hopefully getting good returns from the stock market. Here, since one investment of yours is indirectly invested into multiple stocks, your risk is diversified across multiple companies. And since a Fund Manager (the expert who manages the Mutual Fund) is doing the analysis of each company where the Mutual Fund is investing, you don’t even need to analyze company stocks individually. An expert has already done it for you!
The second awesome way to invest in the stock market is smallcase. Smallcase is a platform that let’s you invest in a basket of stocks (they call one basket as one smallcase). It’s literally that - imagine a gift basket which has an assortment of chocolates that you’d buy for Diwali. You don’t need to choose how many pieces of which sweet or chocolate you want to buy. The most optimum number of chocolates is decided by the shopkeeper and added in the basket, which you buy at a flat rate. Same way, each smallcase has stocks in a proportion which is decided by experts. You need to pay for the entire smallcase (read: basket), and not each separate stock. (The difference here is that unlike your sweet box vendor, smallcase does not charge a premium). There are hundreds of smallcases that they offer to investors. The investor can choose any that suits his/her risk profile and requirements.
Here in smallcase, you’re directly buying stocks of the company, and it’s just packaged to you as a basket (unlike a Mutual Fund where you’re buying units of the Mutual Fund which has further bought stocks of certain companies). In smallcase too, since each basket (smallcase) has multiple stocks, your risk gets diversified.
Now, you may ask - which is better? Mutual Fund or smallcase?
As with all financial advice, it totally depends on your risk appetite. Smallcases have purely stocks, unlike Mutual Funds which have some small amount of money in other investments like bonds as well. One smallcase also has lesser companies generally than a Mutual Fund. So they carry relatively more risk than a Mutual Fund. But then, they also project better returns.
In either case, both smallcases and Mutual Funds are a less risky investment than pure company stocks. So if you’re starting out with equity investments, you should start with these. There are more chances of one company screwing up (if you invest in the company stock) than 5 companies (if you buy a smallcase) or 50 companies (in Mutual Funds). Hence the same 1,000 rupees if invested in one company carries a higher risk compared to the same 1,000 rupees in one smallcase. And this smallcase carries a higher risk than a Mutual Fund where the 1,000 rupees would be invested in 20+ companies. Therefore, while starting out, start with a Mutual Fund or smallcase, where experts pick the best stocks for you, and you don’t need to spend time analyzing a company’s performance.
Well, that’s all for today! Hope this gives you a starting point to begin your Equity investment journey!
If this was a bit overwhelming, please write your questions in comments! Or, feel free to reach out to me on LinkedIn or reply to this e-mail, and I will definitely answer all your questions!
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