Several forms of Stock market investing

Internet and electronic trading have revolutionized the way a common man investor can invest in the markets. We use the term markets very loosely and need to understand specifically the options we have. Each of these markets needs specific skills and knowledge. All are not the same. Each investor need to identify his /her goals, skill set, level of interest and then choose an appropriate investment route.

Stocks are probably the largest in all financial investment mediums. There are several stock exchanges where one could buy stocks through a variety of on line and offline stock brokers. There are also direct purchase options for shares. This involves buying shares directly from companies by avoiding charges etc through share transfer agents such as "Computershare". Bonds are debt instruments where an investor buys a part of the debt through a Bond. This gives a fixed rate of return for each period, quarter, half year or annual. You could again buy a bond through an on line or off line broker. Purchase of shares and bonds requires one to develop certain skills in understanding markets, terminology, identifying safe investment opportunities and so on.

Mutual funds are a method for the investors to participate in stocks and bonds. Mutual funds collect small amounts from investors pool it into a large fund and actively manage their funds. The returns after deducting expenses and taxes are reinvested or paid out as dividends. Investors spend less effort as the mutual fund money managers manage the investments for them. There is a lower risk due to diversity of stocks and bonds held by a balanced fund. Mutual funds are actively managed and hence have a higher expense quotient. The friction caused by purchases, sales and brokerage also adds to expenses.An index fund is passive, just tracks a market and has less expenses.

Derivatives are a more recent phenomenon. It is named as a derivative as it is derived from underlying assets. It is very speculative and has potential for huge gains or huge losses. Common examples are forward contracts, options swaps etc. This needs a very high level of sophisticated skills and understanding.

Participation in any investment needs skills and knowledge. Most of it is gained while actually investing. There are a number of free resources for one to learn. Paper trades- where one trades on paper and not with real money are a way of getting knowledge without burning a hole through your pocket.