Stock investments are one of the most popular avenues of generating wealth in the modern world. You might have heard several things about stock market investors ranging from some horrific losses to inspiring ‘rags-to-riches’ stories. The beauty of this investment avenue is that it treats every investor differently based on his/her approach to investments. Hence, understanding how to invest in stocks is paramount to your success.
What is the share Market?
Before we talk about the share market, let’s understand shares.
What are shares?
Imagine a company running its regular business earning profits and looking for ways to expand.
It decides to launch a new type of product that requires a huge factory installation and skilled workforce – a huge investment.
The company does not have the required funds to create this set-up. Hence, it looks for a loan from a bank or a financial institution or raising money in some other way that does not require interest payment on the raised sum.
One way to do this is to add partners by asking them to contribute a certain amount towards the capital of the company.
A company is legally permitted to do this by issuing shares. When a company decides to raise capital, it issues shares to people. The amount of shares held by you determines the percentage of holding you have in the company.
So, if a company is worth Rs.10 lakhs and you hold shares worth Rs.1 lakh, then you are a 10% partner in the company. You will be eligible to receive a share of the profits made by the company.
This is a very simple way of understanding shares.
Since a share is a document certifying your ownership in a company, you can sell it to someone for a price.
So, if you are a partner in ABC Ltd, you can transfer your rights in the company to a third party by informing the company about the same.
Let’s say that you want to become a partner in HDFC Bank Ltd. Where would you go to find its shares? The company issues shares only when it wants to raise capital. How do you find the existing shareholders of the company and at what price do you buy the shares?
To facilitate this, regulators around the world developed a marketplace where investors could buy and sell shares of any company listed on the stock exchange.
So, if you wanted to buy shares of HDFC Bank Ltd., you can visit this marketplace and buy them at the current market price.
The marketplace has a process with several intermediaries that ensures that the company is informed about the change in shareholder, the buyer receives the shares, and the seller receives the money. This is the Share Market.
When a company issues shares to the public for the first time, it launches an Initial Public Offering (IPO) by predetermining the share price.
This is the primary share market where you purchase the shares directly from the company during an IPO. As soon as the company finishes issuing shares through the IPO, they are listed on a stock exchange. This is the secondary market where you can buy and sell shares to other investors.
Intermediaries in a Share Market:
When you buy a share of a company from another shareholder, there are many things that can go wrong. Hence, every country has a regulatory body that ensures that the stock transactions are smooth and devoid of fraud.
In India, this body is the Securities and Exchanges Board of India (SEBI). This body has defined a process for share transactions to help ensure maximum protection to all investors that include the following intermediaries:
1.Stock Broker– SEBI has mandated that all transactions in a stock exchange must be done through a stockbroker registered with the exchange.
2.Depository and Depository Participant – While traditionally, shares were allotted in the form of physical share certificates, this has now given way to electronic or dematerialized shares. Just like you need a bank account to keep a record of your dematerialized money, you need a Demat account for your dematerialized shares. This account is provided by a depository participant.
3.Bank- You need money to buy shares and a bank account to receive sales proceeds. Hence, a bank is an essential intermediary in share transactions.
4.Clearing Corporation- This body ensures that all transactions are cleared successfully.
How to Invest in the share Market?
Now that you understand shares and the concepts of a share market, we come to the next important question i.e:How to invest in shares?
REQUIREMENTS TO INVEST IN THE SHARE MARKET:
Let’s first look at what you need to begin investing:
1.PAN Card– It is mandatory to have a PAN Card to invest in stocks.
2.Demate Account– This is the account that will hold the shares in the name of the buyer. You can open a Demat account with any depository participant. Most banks offer Demat account services. New age investment platforms also offer Demat account opening in a hassle-free manner.
3.Trading Account- To start making a stock market investment, you need a trading account with a stockbroker. Remember, stockbrokers, register with stock exchanges. While most good-quality stocks are listed on both primary exchanges (BSE & NSE), some might only be available on either of the two. Ensure that you open a trading account with a broker registered with both BSE & NSE.
4.Linked Bank Account– Since you are investing in stocks, you will be buying and selling them over time. Hence, you will need a bank account that is linked to your trading account to ensure that money flows in and out of your account seamlessly when you transact.
3.A cancelled cheque from your bank account with your name on it
4.Proof of address (from the list of documents accepted by the bank/depository participant/broker)
5.Proof of income
With these accounts in place, you are set to begin your stock market investment journey.
As explained above, there are two markets that you can consider – primary and secondary. We will look at the investment process in both these markets.
1.Investing in the Primary Market(IPOs):
Investing in the primary market involves investing in an IPO. You will need a Demat account to hold the allotted shares and a trading account to apply online. You can also apply through your bank account. Now it’s important to remember the number of shares allotted to you will depend upon the market’s response to the IPO. Once the company receives all IPO applications, it allots shares based on the demand and availability of shares.
You can easily apply for an IPO through your net banking account through a process called ASBA (Application Supported by Blocked Amount). In this process, if you have applied for shares worth Rs.1 lakh in an IPO, the amount is blocked in your banking account instead of being sent to the company. Once the shares are allotted the exact amount is debited and the balance is released. It is mandatory for all IPO applications to follow this procedure. Once the shares are allotted, they are listed on a stock exchange within a week and you can start trading them.
2.Investing in the Secondary Market:
This is where all the action is. The secondary market is usually what we refer to when we say the stock market. It is the place where investors and traders buy and sell stocks. To invest in the secondary market, you will need a trading account, Demat account, and a linked banking account. If you are thinking about how to invest in share market online, then the answer is simple:
i) Open a Demat and trading account with a linked banking account.
ii) Log in to the trading account
iii) Choose the share that you want to buy or sell
iv) Ensure that you have funds in your account for buying and shares in your Demat account before selling
v) Determine the price at which you want to buy/sell
vi) Wait for the seller/buyer respectively
vii) Complete the transaction by transferring shares/money and receive money/shares
The process is simple. However, becoming a successful investor is hard work. Let’s look at some concepts that you need to understand and tips that you can use for investing in the secondary market.
THINGS TO KEEP IN MIND BEFORE INVESTING:
Now that you are clear with the basics, let’s see what are the other things you need to consider before investing.
i)Understand Your Investor Profile:
Every investor is unique. Hence, you must ensure that you invest based on your investor profile. There are three critical factors that can help identify your profile:
Financial goals– Define your financial goals. What are you trying to achieve? Retirement corpus? Funding your world tour? Planning a marriage? Thinking of buying a house? These goals will help you get clarity on how and which stocks to invest in.
Risk Tolerance – How much risk can you stomach? If you invest in the stock of a strong company like Tata, then the price will not move up or down a lot. It will be relatively stable. On the other hand, if you invest in a small company that seems promising, then every small achievement will boost the stock price and failure will result in a crash. You need to determine how much volatility you can handle without panicking and making wrong decisions.
Investment Horizon – Stock investments tend to offer good returns over a period of 7-10 years (long-term). Based on your financial goals, determine the period for which you want to stay invested in a particular stock.
ii)Research the Company Before Investing:
Unless you are trading, don’t make investment decisions based on the stock price alone. Stock investment is a marathon – not a sprint. Hence, you need to invest in a stock that can endure a long journey and generate good returns too.
One of the best ways to find such stocks is by looking at the financials of the company. Without complicating things, simply try to assess if the company is financially sound and can withstand any economic turbulence that the future might bring. A strong company usually attracts positive investor perception and a higher stock price.
Since stock investments carry market risks, it is important to make efforts to reduce the risk of your equity portfolio as much as you can. One of the best ways of reducing risk is diversification. Here’s why –
a) If you invest in too many banking stocks and some policy change or international event impacts the banking sector negatively, then a huge part of your investment can suffer. Hence, while investing ensure that you diversify across sectors and industries.
b) If you invest in stocks of companies having their primary office in Mumbai and some incident brings Mumbai to a halt, then your returns can get impacted. Hence, diversify across cities, states, and even countries to minimize this impact.
c) We all like to bet on the dark horse. In the share market, stocks of small-cap companies are the proverbial dark horses, and stocks of large-cap companies are the defending champions. While choosing either is your decision, it is better to invest across all market-caps.
iv) Track Your Investments Regularly:
While many investors believe in the concept of ‘invest and forget’, investors must keep track of their investments. A stock market is a volatile place. By tracking your investments, you can identify opportunities to sell and rebalance your portfolio to maximize gains. You can also curb your losses by selling non-performing stock before they hit rock-bottom.
We hope that this article covered most of your questions regarding how to invest in the stock market. This is one of the best ways to generate wealth but requires some patience, persistence, and a strategic approach.