If you are asked to picture a Wall Street investor, what image comes to mind? Probably a slick, 30-something man in a dark suit and tie, always on his phone, rattling off numbers in a tone that suggests someone’s life is on the line? Maybe you pictured Hrithik Roshan from Zindagi Na Milegi Dobara. It’s an image we’re all too familiar with. Now what if I ask you to picture a Dalal Street investor? This is harder to do. Mostly because the Indian stock market is much younger than the US stock market, and we don’t have as many related films in mainstream media. Okay, so where am I going with this?
What if I told you that when I think of an Indian stock market investor, I picture you. And me. And everyone around me. Not someone in a fancy suit spending sleepless nights talking numbers 24*7, but someone simple like you and me. Someone who is betting on the future of India being great and who is investing their money in companies that will not only help the nation grow but will also help their own wealth grow. Do you see yourself as this person? And what does it really mean to invest in the stock market?
A break-down of the Stock Market
Back in the day, Dalal Street was a physical marketplace where people gathered to buy and sell shares of various companies listed on the stock exchange. The two most popular stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Companies are listed on these exchanges and the market indices give us a general idea of how the overall market is performing.
To put it simply, Sensex, also called the BSE 30, is a market index consisting of 30 well-established companies listed on the Bombay Stock Exchange. Whereas, Nifty, also called the Nifty 50, is a market index consisting of 50 well-established companies listed on the National Stock Exchange. These companies provide a representation the overall market that consists of thousands of listed companies.
If I invest in Mutual Funds, am I investing in the Stock Market?
Technically, when you invest in equity mutual funds, you are investing in the stock market, albeit indirectly. The mutual fund manager is the one picking the companies to invest in, and you in turn are selecting this basket of companies, better known as a fund.
Direct equity investing however, involves picking companies yourself. Of course, you may do this with the help of a broker or a financial advisor, but I like to go with one of Warren Buffett’s well-known commandments. Never invest in a business that you don’t understand. Do your own research.
Fundamental Analysis versus Technical Analysis
Speaking of research, there are two major schools of thought when it comes to studying the stock market.
Fundamental analysis refers to the study of the financials of the company, an evaluation of the company’s management, understanding the business and the industry conditions as well as the overall economy in relation to the company’s business.
Technical analysis on the other hand deals with analysing movements in the stock prices and volume. A lot of charts, patterns and trends feature into a technical analyst’s toolkit.
Both schools of thought aim to equip an investor with the knowledge needed to make decisions on whether to buy, hold or sell the stock.
Two Important Questions when investing in the Stock Market
By now, you’d agree that investing directly in the stock market requires dedicated time and energy. Here are two questions to ask yourself should you choose this path for your investing journey.
1. Are you an investor or a trader?
This is the first question you need to ask yourself. The answer will also determine your approach to the kind of research you do and the kind of companies you select for your portfolio.
As an investor, you are looking at the long-term viability of the companies you choose. But as a trader, you are more focused on the short-term price changes of the company. The goal for the latter is to find opportunities when you can buy low and sell high. This is no way implies that investors are okay with losses. It’s just a case of whether you are a marathoner or a sprinter with your investment choices.
In a 1998 lecture at the University of Florida Business School, Warren Buffett said, “I want a simple business, easy to understand, great economics now, honest and able management, and then I can see about in a general way where they will be ten years from now. If I can’t see where they will be ten years from now, I don’t want to buy it. Basically, I don’t want to buy any stock where if they close the NYSE tomorrow for five years, I won’t be happy owning it.”
2. Is this your cup of tea?
Regardless of whether you are an investor or a trader, the stock market demands considerable time and inkling to do the work. It can often turn into a full-time job, especially when you start getting better and better at the art of stock-picking.
Quoting Buffett once again, “I think you should read everything you can. In my case, by the age of ten, I’d read every book in the Omaha public library about investing, some twice. You need to fill your mind with various competing thoughts and decide which makes sense. Then you have to jump in the water – take a small amount of money and do it yourself. Investing on paper is like reading a romance novel versus doing something else. You’ll soon find out whether you like it. The earlier you start the better.”
Reading voraciously and talking to people associated with the industry you’re researching will tell you what really matters. And this approach can greatly improve the return on your investments. But at the end of the day, do this only if it really interests you, not because the next person is doing it. If investing in direct equity isn’t your cup of tea, equity mutual funds are a wonderful way to expose your investments to the stock market.
More than just numbers
Investing in the stock market goes deeper than just checking stock prices and calculating the percentage of return earned. It’s not as boring and intimidating as Hrithik’s character in ZNMD is made out to be. The stock market is a fascinating world that can enrich your perspective on business and life. We’ve barely scratched the surface of this subject today. There is a lot more that goes into being a stock market investor. And if you can picture yourself as one, the way I can, nothing can stop you from taking that leap.
If you are someone who has been curious about the stock market, eager but hesitant to invest, just start. Figure out your why, set aside some time for study, and take baby steps. The Intelligent Investor by Benjamin Graham is one of the best books on value investing. And Varsity by Zerodha is a great place to learn more about this world.
We also have a new workshop for women that we’re super excited about – Introduction to the Stock Market. It kicks-off in just a few weeks, so reserve your spot before registrations close.
Until next time.
