Author: Pranjal Kamra, CEO, Finology
For all those looking to graduate from Mutual Funds to the stock market, you should know that investing in the former is different from doing so in the latter. For instance, Nifty is an index that consists of the top-50 listed companies on the National Stock Exchange (NSE). Sensex, on the other hand, is a 30-stock barometer of the Bombay Stock Exchange (BSE). These are blue-chip stocks of best-performing companies belonging to various sectors.
If you’re planning to invest in the same, here are a few things that will get you through.
Prepare an investment goal
Knowing how to achieve your financial well-being is one of the most crucial things you can do for yourself. And, you don’t have to be an expert to do the same. You only need to know a few basics, form a plan, and be disciplined enough to follow it.
Start by asking yourself what you want and list your most important financial goals. You must decide whether you’re investing for marriage, your child’s college fund, retirement, or anything else. Then, decide how many years you have to meet each specific goal. It is because when you invest, it will make a lot of things – including entry and exit – simpler for you.
Open Demat and trading accounts
To start investing, you will need Demat and trading accounts. Here’s how you go about it:
Step 1: Choose a stockbroker t(ideally the one that offers Demat and trading account)
Step 2: Fulfill KYC (Know Your Customer) Norm.
Step 3: Complete the Verification Process and you’re all set
Set a budget for your stock investment
Setting a budget is another vital part of investing. You need to figure out how much money you need to start investing in stocks. Also, analyze if will it be favorable to make annual lump-sum investments or will it be more lucrative to drive them on a monthly basis. This budget will ultimately depend on your investment goals and how they can be attained. Here, you must avoid having unrealistic expectations such as annual returns of 20% or beyond.
Investing in Nifty
Once you have all of this figured out, you’re ready for indices such as Nifty. There are several ways to do so:
- Spot Trading:
The simplest way to invest in Nifty is by purchasing the Nifty scrips such as ITC, GAIL, and so on. Once you have done that, you’re eligible to benefit from the capital gains arising when their price increases.
- Derivative Trading:
Derivatives are financial contracts that gain their value from an underlying asset. These could be stocks, commodities, currencies, etc. With this method, the parties agree to settle the contract on a future date and make a profit by wagering on the future value of the underlying asset. For trading in the Nifty index, you have two derivative instruments:
- Nifty Futures:
In simple terms, a futures contract is an agreement between the buyer and the seller for trading Nifty lot(s) on a future date. During the contract period, if the price goes up, you can sell the stock and earn the yield. You can also wait till the settlement date if the price goes down.
- Nifty Option:
An option contract is the one that is set between a buyer and the seller for trading Nifty lot(s) on a future date at a specific price. The buyer of the option contract obtains the legal right by paying a premium. However, they do not have an obligation to purchase/sell Nifty in the future if the price is to their advantage.
This is a type of mutual fund with a portfolio (stocks, bonds, indices, currencies, etc.) designed to match or track the components of the market index (stocks and their price fluctuation), which provides broad market exposure. These funds invest in various indices including Nifty.
The growth of the Nifty index and the stock market at large in recent years has attracted retail investors, institutional investors, and foreign investors alike to put their money in the index either directly or via their index funds. Just keep the abovementioned points in mind while investing and you’re good to go.
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