What is Investment ?
Investment is the process of making money from money without doing any actual work. Investors look for options which can maximise the return and minimize the risk for their investment. No one likes losing money but people do invest in risky options for a chance to get a much higher return. Stock market is one of the most popular investment options that involves a lot of risk. Whenever an investor opens a position in the market they expose themselves to this risk until the position is closed by doing the opposing trade, which might result in a profit or loss.
Why this post ?
There are various ways to invest in the stock market and that’s what makes it a bit confusing, although the basic concept is pretty simple as in any other investment vehicle, money goes around and you either end up with more or less than what you started with.
The purpose of this post is to categorize and explain all possible ways of investment in a stock market in a simple manner.
(assumption is that the reader has a basic understanding of the stock market and various terms and jargons associated with it, if you haven’t it is better to look them up on sources like, wikipedia, investopedia, reddit etc.)
How Stock Market Works !
In theory stock markets or exchanges are established to allow businesses to raise money from the public. Once a company comes into public domain the value of that company is decided by the stakeholders and then the stock market becomes a price discovery mechanism for this valuation process. As a result the value of a company can go up or down over a period of time based on the evaluation process of its ever changing stakeholders. Individual Investors are supposed to use in-depth fundamental analysis to evaluate the business and see whether the business is undervalued or overvalued in the market and invest or divest based on this information and keep the valuation in check.
In practice, most investors use speculative analysis to predict the movement of share price of a company and open and close position based on that. Valuation can increase or decrease over time and the beauty of the stock market is that one can make a profit either way if they open the right position, and to top that with derivatives investors can create assets for other investors to earn regardless of market movement.