How To Start Investing In Share Markets In India
Investing in the share market can be tricky especially as a beginner. If you want to invest in stocks, you should keep in mind that there are two types of share markets: primary and secondary share markets.
An investor cannot directly buy or sell shares on a stock exchange. Registered members of a stock exchange are called stock brokers. They trade on an investor’s behalf. They are either an independent service provider, or employed at a brokerage firm. It is ideal for them to have the required qualification and experience in the field of finance. A broker in the stock market scenario is also called a Trading Member.
A stock broker is familiar with the formalities of market and hence, you may depend on their judgment and knowledge. They can enable you to make the right decisions in the market.
What Is The Stock Market?
In simple terms, a stock market is a marketplace where financial instruments are traded — these can be stocks, bonds, commodities, among others.
The two primary stock markets in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The NSE is by far the largest, with over 90% of cash trades. There are also other exchanges for commodities like the Multi Commodity Exchange (MCX) and the Indian Energy Exchange (IEX) for power trading and so on.
All activities as well as participants of the stock markets including day-to-day trades, instruments being traded, exchanges that enable the financial instruments to be traded, are regulated by the Securities and Exchange Board of India (SEBI).
Apart from listing companies, these exchanges also manage indices. An index is a basket of stocks that represents a theme, be it size or industry. It also allows investors a common gauge on the trend in the stock market.
The most common indices in India are the NIFTY and SENSEX. NIFTY is a basket of top 50 stocks by market capitalization listed on the NSE. The SENSEX is a similar index of 30 companies listed on the BSE.
The stock market indices are commonly used to benchmark the performance of fund managers and other stocks. For instance if a mutual fund that benchmarks its performance to the NIFTY did 15% returns this year and the NIFTY did 20%, the mutual fund actually “underperformed” its benchmark. This means you would have been better off just buying those 50 NIFTY stocks instead of relying on the fund managers’ expertise.
You cannot buy or sell directly on the stock market. For this, you have to go through brokers who are authorised to trade on the market or stock brokerage companies that allow you to trade using their platform. The process is simple:
- To begin investing, you have to open a trading account with a broker or a stock brokerage platform. A trading account is where you actually “trade” or place buy or sell orders.
- The broker or the stock brokerage platform opens a demat account for you. A demat account holds the financial securities in your name.
- These two accounts are then linked to your bank account.
- To open a trading and demat account, you need to provide Know Your Customer (KYC) documentation that includes verification via government-authorized identity cards such as the PAN card or your Aadhar.
- Most brokers and brokerage platforms now have an online KYC process that allows you to open an account in a couple of days by submitting your verification details digitally.
- Once open, you can trade with your broker or brokerage company online via a portal or offline via phone calls.
There are a few types of charges that you will usually pay:
- Transaction costs: All brokers are paid a brokerage, which is a fee they take to facilitate a trade for you. With the advent of discount brokers, these costs are quickly shrinking. Apart from brokerage, they also collect taxes and dues paid to the government on each transaction, such as the Securities Transaction Tax (STT), SEBI charges, Goods and Services Tax (GST), among others.
- Demat charges: While your broker or brokerage platform opens your demat account for you, they do not operate it. Demat accounts are operated by central securities depositories such as NSDL or CDSL, under the government’s jurisdiction to safeguard your interest. You are expected to pay nominal annual charges (typically collected by your broker or the brokerage platform) to maintain your account. These charges range anywhere between INR 100 to INR 750.
- Taxes: You pay a percentage of your profit from your investments to the government as taxes. For stocks, if you hold them for longer than a year, you pay long-term capital gains tax, which is 10%, and if you hold for less than a year, you pay short-term capital gains tax, which is 15%. Both of these tax rates change based on cess or surcharge charged by the government.
What Can You Invest In The Stock Market?
The key financial instruments traded on the stock market are:
- Equity shares: Issued by companies, equity shares entitle you to receive a claim to any profits paid by the company in the form of dividends.
- Bonds: Issued by companies and governments, bonds represent loans made by the investor to the issuer. These are issued at a fixed interest rate for a fixed tenure. Hence, they are also known as debt instruments or fixed income instruments.
- Mutual Funds (MFs): Issued and operated by financial institutions, MFs are vehicles to pool money which is then invested in different financial instruments. Profit from the investments is distributed between the investors in proportion to the number of units or investments they hold. These are called “actively” managed products where a fund manager takes calls on what to buy and sell on your behalf to generate better returns than the benchmark (like the NIFTY).
- Exchange Traded Funds (ETFs): Increasingly gaining popularity, ETFs essentially track an index like the NIFTY or the SENSEX. Once you buy a unit of the ETF, you hold a part of the 50 stocks in the NIFTY in the same weightage that the NIFTY holds them. These are called “passive” products, which are typically much lower in cost than MFs and give you the same risk or return profile as the index.
- Derivatives: A derivative derives its value from the performance of an underlying asset or asset class. These derivatives can be commodities, currencies, stocks, bonds, market indices and interest rates.
Things To Keep In Mind Before Investing
Although stock trading isn’t as difficult as it seems, it is possible to be swept away by the world of trading without being rewarded by it in the long term. To prevent this outcome, keep the following points in mind before investing:
1. Diversify Your Portfolio
A diverse portfolio is a healthy portfolio. If a particular asset class dominates your portfolio, it will not offer a steady stream of funds your way when that instrument is going through a low patch. To offset the low periods of one asset class, financial advisors recommend adding alternative asset classes. For instance, equity is often offset with investments in bonds or other debt instruments. This balance in a portfolio can secure one against a period of market crisis.
2. Understand Your Investor Profile
Your investor profile can reveal the kind of instruments that are best suited to your risk appetite. This allows you to ensure that you are taking on the amount of risk that is best suited to your lifestyle.
3. Create An Investment Plan
You can avoid potential pitfalls down the line if you have an investment plan that states the amount of revenue you wish to earn from your investments and the time horizon you potentially need to remain invested to earn that amount.
Investments in the primary share market are through an Initial Public Offering (IPO). After a company receives all the applications made for an IPO by investors, the applications are counted and shares are allotted based on demand and availability. To invest in both primary and secondary markets, you need to have a Demat account that will hold electronic copies of your shares. Additionally, a trading account is also important which will help in buying and selling shares online.
In rare cases, it is also possible for a trader to apply directly from their bank account. IPO application through net banking is made easy via a process that is known as Application Supported by Blocked Amount (ASBA).
As per the ASBA process, if one applies for shares that are worth ₹1 lakh, instead of being sent to the company, these funds will be blocked into their bank account. Once you receive your allotment of shares, the exact amount will then be debited with the balance being released. All applications that are sent to IPOs are required to follow this protocol. Once shares are allotted to traders, they are listed on the stock exchange, and you can begin trading them within one week.
Secondary share market investing or trading refers to the regular purchase and sale of shares or stocks. There are a few simple steps to follow before you start investing in the secondary share market.
Step 1:Open a Demat and trading account.
This is the starting point to invest in the secondary market. Both of these accounts should be linked to a pre-existing bank account for a seamless transaction.
Step 2:Selection of shares.
Log into your trading account and choose the shares that you wish to sell or buy. Ensure that you have the requisite amount of funds in your account to purchase those shares.
Step 3:Select the price point
Decide the price at which you want to buy or sell a share. Wait for the buyer or seller to reciprocate that request.
Step 4:Complete the transaction
Once the transaction is complete, you receive either shares or money for the stocks that you have respectively purchased or sold.
Ensure that you are mindful of the duration for which you remain invested and the financial goals you wish to achieve through your investments.
Documents Required For Opening A Demat/Trading Account
To begin investing in the share market, you need to have the following documents:
- PAN Card
- Aadhaar Card
- Name on a cancelled cheque from their active bank account showing IFSC Code, account number, Account holder’s name, and signature.
- Documents detailing that the applicant earns a steady income.
- A proof of address that is based on a list of documents that have been accepted by your broker, depository participant, or bank
- Passport-sized photographs of the applicant.
Let’s see a step by step guide on how to invest in the share market in India
- Screening and Filtering the right stocks using Financials
- Select only the companies that you understand
- Look for companies with sustainable Moat (competitive advantage)
- Find Low Debt Levels Companies
- Use financial ratios RoE and RoCE to identify the right stocks
- Honest, Transparent, and Competent Management
- Find the Right Price to Buy the Stock
You can learn about stock investments with as little as Rs. 10,000 investment.
If you don’t have demat account, then I would suggest you to open Zerodha account, which is one of my favourite service providers for advance platforms and better customer service.
Learn the approach and apply with 10,000 investment, if you make 5000 profits in the first year then the same approach can be applied with Rs. 10,00,000 investment to make Rs. 5,00,000 as profits in the future.
How Should You Decide What To Buy?
- Decide your risk appetite
Risk appetite is the amount of risk that you can withstand. Several factors influencing risk appetite include the timeline of investment, age, goal and capital. Another key variable to keep in mind is your current liabilities. For example, if you are the sole earning member of your family then you will be less inclined to take risks. Here, maybe you’ll have more debt, large cap stocks, in your portfolio.
On the other hand, if you are younger, with no dependents, you may have a high risk appetite. This may allow you higher exposure to equities vs. debt. Even within equities, you may be able to invest in more small caps, which are higher risk stocks. The starting point is to make a choice keeping in mind that risk and reward go hand in hand.
- Invest regularly
Now that you have a demat account, you need to allocate funds for regular investment. Set a personal budget, track your expenses, and see how much you can set aside. The best way to invest in the market is to use a Systematic Investment Plan (SIP). A SIP is investing the same amount of money every month in, say, a mutual fund. This allows you to average the different market levels you come in at, maintain good investing habits and slowly increase your investments as you gain confidence.
- Build a diverse portfolio
The basic rule for building any portfolio is to invest in a diverse range of assets. This is because it minimizes the impact if a certain asset performs badly. Diversification extends within the asset class, industry, and cycles. It may be tempting to park all your money in an industry that is in an upward swing. But it is always better to distribute between industries, balancing market cap exposure, and offset the risk of equity shares with stable, but lower return bonds. Finally, use SIPs to make sure you have invested in securities across different market cycles.
- Rebalance your portfolio
As your priorities change with time, your portfolio must also change to reflect this. You must rebalance your portfolio every couple of quarters to make sure you are not over or underexposed to any one stock or asset class. This is also necessary as you grow older and your priorities change. For instance, you may want to lower your risks when you start a family or when you are nearing retirement age.
Anyone can invest in the stock market. It is a life skill that needs to be honed and like all good things, it needs a little patience, time and study. With thoughtful investment, you can make your money work for you and achieve your goals and dreams.
Disclaimer: The stocks mentioned in the article is not a recommendation to buy or sell. We are taking them as an example. Invest in the stocks after your own due diligence.
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