Hello Investors. Today we are going to talk about one of the most basic topics for a newbie- How to invest in the share market? I have been planning to write this post for a number of days as there are many people who are willing to invest, however, do not understand how to invest in the share market. Through this article, they will get the solutions to their question and study the step-by-step process of how a beginner can start investing in the Indian share market.
Please note that this post might be a little longer as I am trying to cover all the fundamentals that a beginner should know before coming into the stock investment world. Make sure that you read this article. It will be definitely worthwhile reading it. Let’s get started.
Prerequisites before you begin investing
For investing in the Indian stock market, there are a few prerequisites that I would like to point out first. Here are the few things that you will need to make investments in the share market:
1. Bank Savings account
2. Trading and Demat account
4. Internet connection
(Thanks to Reliance Jio, everybody has a 4G web connection now..)
For opening a Demat and trading account (usually opened altogether and known as a 2-in-1 account), the following documents are required:
1. PAN Card
2. Aadhar Card (for address proof)
3. Canceled cheque/Bank Statement/Passbook
4. Passport size photos
You can have your financial savings account in any private/public Indian bank.
Where to open your trading and Demat account?– This will be discussed later in this post on Step 4 ‘how to choose your stockbroker’.
Get your files ready. If you do not have a PAN card, then apply as quickly as possible (if you are 18 years old or above).
3 Basic Advice before you start investing
When you are new to the stock market, you enter with lots of desires and expectations. You might be planning to invest your financial savings and make lakhs in return.
Although there are lots of examples of people who had created huge wealth from the stock market, there are also thousands who didn’t.
Here are a few cautionary factors for people who are simply entering the world of investing.
— Pay down your ‘High-Interest’ debts first
If you have any type of high-interest paying debts like personal loans, credit card dues debts, etc, then pay them first. The interests of these loans can be even as excessive as your returns from the market. There is no point in wasting your energy to provide all the returns you made from the market as interests of your debts. Pay down these debts before coming into the market.
— Invest only your additional/ surplus fund
Stop right there if you are planning to invest your next semester tuition fee, next month flat rent, savings for your daughter’s marriage. which is going to happen next year or any comparable reasons.
Only invest the amount that won’t affect your everyday life. In addition, investing in debts/loans is absolutely a bad idea, mainly. When you are new in the market and learning how to invest in the share market.
— Keep some money in hand
The money in hand doesn’t just serve as your emergency fund. It also serves as your key to freedom. You can take big steps like simply shifting to a new city, or quit your annoying job, or changing your little flat, or only when you have money in hand.
Do not get trapped via investing all your cash and later losing your freedom. Do not sacrifice your personal freedom in the identity of financial freedom.
Now that you have understood the pre-requisites and the basics, here are the seven steps to study how to invest in the share market on your own. Do follow the step sequences for a convenient method to enter the stock market world.
How to Invest in the Share Market?
Step 1: Define your investment goals
It’s vital to start with defining your investment goals. Start with quiet dreams in mind. Know what you want.
Do you desire to grow your saved money (capital appreciation) to beat inflation and get higher returns? Do you want to build passive earnings from your investments through dividends? Are you investing in a particular goal? Or do you simply want to have fun in the market along with developing wealth?
If you want to simply have fun and want to learn, that’s okay. But make sure that you do not over-invest in the market or get too much attracted to the market? Moreover, most people start the same way and define their desires later.
Anyways, if you are beginning for Goal-Based Investing, do remember that the time frame for different investment goals will be different. Your aim can be anything like buying a new house, new car, funding your higher education, children’s marriage, retirement, etc. However, if you are investing in your retirement, then you have a better time frame compared to if you are investing in buying your first house.
When you know your goals, you can figure out how much you want and for how long you have to stay invested.
Step 2: Create a plan/strategy
Now that you know your financial goals, you need to define your strategies. You might need to figure out whether you want to invest in a share lump sum (a large amount at a time) or by the SIP (systematic investment plan) approach. If you are planning small monthly investments, analyze how much you want to invest monthly.
There’s a common misconception among our society that you need large financial savings to get started. Say, one lakh or above. But that’s not true. As a thumb rule, first, build an emergency fund, and next begin allocating a fixed amount let’s say 10-20% of your monthly profits to save and invest. You can use the remaining portion of your profits for paying your bills, mortgages, etc. Nevertheless, even if your allocated amount turns out to be Rs 3-5k or more, it’s right enough to build an investing habit.
Step 3: Read some investing books.
There are a variety of decent books on stock market investing that you can study to brush up on the basics. Few good books that I will advise the beginners should read are:
• The Intelligent Investor by Benjamin Graham.
• One up on wall street by Lynch.
• Common stocks and uncommon profits by Philip A. Fisher
• The Dhandho Investor by Mohnish Pabrai
• The little Book that beats the Market (Little Books Big Profits) by Joel Greenblatt
Besides, there are a couple of more books that you can read to build good fundamentals of the stock market.
Step 4: How to choose your stockbroker
Choosing an online broker is one of the biggest steps that you need to take. There are two kinds of stockbrokers in India:
1. Full-service brokers
2. Discount brokers
— Full-Service Brokers (Traditional Brokers)
They are standard brokers who provide trading, research, and advisory facilities for stocks, commodities, and currency. These brokers charge commissions on each trade their clients execute. They also facilitate investing platforms in Forex, Mutual Funds, IPOs, FDs, Bonds, and Insurance.
Few examples of full-time stockbrokers are ICICIDirect, Kotak Security, HDFC Sec, Sharekhan, Motilal Oswal, etc
— Discount Brokers (Budget Brokers)
Discount brokers simply provide the trading facility for their clients. They do not provide advisory and hence suitable for a ‘do-it-yourself’ type of client. They offer low brokerage, high speed, and a decent platform for buying and selling stocks, commodities, and forex derivatives.
A few examples of cut-price brokers are Zerodha, Upstocs, 5 Paisa, Trade Smart Online, Paytm Money, Groww, etc.
I will highly recommend you to pick discount brokers (like Zerodha) as it will save you a lot of brokerage charges.
Initially, I started trading with ICICI direct (which is a full-service broker), however soon realized that it was too high-priced when compared to discount brokers. It doesn’t make sense to pay more brokerage costs even if you get similar benefits. And that’s why I shifted to Zerodha as my stockbroker.
Zerodha (a discount broker) charges a brokerage of 0.01% or Rs 20 (whichever is lower) per executed order on Intraday, irrespective of the variety of shares or their prices. For delivery, there is a zero brokerage cost in Zerodha. Therefore, the maximum brokerage that you’ve to pay per trade while the use of the Zerodha platform is Rs 20 and it doesn’t depend on the quantity of trading.
This is way cheaper compared to ICICI direct (full-service stockbroker) which asks for a brokerage of 0.55% on every transaction. If you buy shares for Rs 50,000 in ICICI direct, then you have to pay a brokerage of Rs 275 for delivery trading i.e. when you hold the share for more than one day in your Demat account.
Further, as this amount is charged on both sides of the delivery transaction (buying & selling), for this reason, you have to pay a total of Rs 550 for the entire transaction in ICICI direct (way too expensive than Zerodha).
In short, if you are planning to open a new trading account, I would advise opening accounts in a discount broker so that you can keep lots of brokerages. If you’re interested to open your trading account with Zerodha, here’s the direct link to fill account opening application!
Step 5: Start researching common shares and invest
Start noticing the companies around you. If you like the product or offerings of any company, dig deeper to find out extra about its parent company, like whether it is listed on the stock exchange or not, what is its present-day share price, etc.
Most of the products or services that you use in day to day lifestyles — From soap, shampoo, cigarettes, bank, petrol pump, SIM card or even your inner wears, there is a company at the back of everyone. Start researching about them.
For example- if you’ve been using HDFC debit/credit card for a long time and satisfied with the service, then investigate further about HDFC Bank. The information of all the listed companies in the share market of India is publicly available. Just an easy ‘Google search’ of ‘HDFC share price’ will provide you a lot of important pieces of information.
Similarly, if your neighbor bought a new Baleno or another car. They try to find out more about the car parent company, i.e. Maruti Suzuki. What different products it offers and how is the company performing recently- like how are its sales, profits, etc.
You do not need to start investing in shares with hidden gems. Start with the famous large-cap companies. And as soon as you are comfortable in the market, invest in mid and small caps.
Step 6: Select a platform to track your overall performance
You can simply use MS excel or google spreadsheet to track the performance of your stock. Make a spreadsheet with three tables containing:
1. The shares that you are interested in and need to study/investigate,
2. Those stocks that you have already studied and observed decent,
3. Miscellaneous stock- for the other shares that you want to track.
This way, you can without difficulty observe the stocks. In addition, there are so many financial websites and mobile apps that you can use to keep track of the stocks. However, I would suggest you track your stocks on Moneycontrol, TradingView, Upstox, etc.
Step 7: Have an exit plan
It’s always excellent to have an exit plan. There are two methods to exit a stock. Either through booking profit or by cutting a loss. Let’s talk about both these scenarios. Basically, there are only four situations when you should sell a good stock in your portfolio:
1. When you badly want money
2. When the stock fundamentals have changed
3. When you discover a better investment chance and
4. When you have reached your investment goals.
If your investment dreams are met, then you can exit the stocks happily. Or at least, book a portion of the profit from your stock market portfolio and shift it to other safer investment options. On the other hand, if the stock has fallen below your risk appetite level, then again exit the stock. In short, always be aware of your exit options before entering.
That’s all. There are seven steps that will assist you to learn how to invest in the share market. Now, here are a few other important factors that each stock market beginner should know:
10 factors to take care in Share Market
1. Start small
Do not put all your cash on the market in the beginning. Start small and check what you have learned. You can begin even with an amount of Rs 500 or 1000. For beginners, it’s more vital to learn than to earn. You can invest in a large quantity once you have more confidence and experience.
2. Diversify your portfolio
It’s genuinely necessary that you diversify your portfolio. Do not invest all in simply one stock. Buy stocks from companies in different industries.
For example, two shares of Apollo Tyres and JK Tyres in your portfolio won’t be called a diversified portfolio. Although the companies are different, however, each company belongs to an equal industry. If there is a recession/crisis in the tyre sector, then your complete portfolio might be in RED.
A diversified portfolio can be something like Apollo tyres and Hindustan Unilever shares in your portfolio. Here, Apollo Tyres is from the Tyre industry and Hindustan Unilever is from the FMCG industry. Both the stocks are from unique industries in this portfolio and hence are diversified.
3. Invest in blue-chip shares (for beginners)
Blue chips are the shares of those reputed organizations who are in the market for a very long time, financially sturdy, and have an excellent track record of consistent growth and returns in the previous many years.
For example- HDFC banks (leader in the banking sector), Larsen and Turbo (leader in the construction sector), TCS (leader in the software program company), etc. A few different examples of blue-chip shares are Reliance Industries, Sun Pharma, State bank of India, etc.
These corporations have stable overall performance and are very less volatile. That’s why blue-chip shares are considered secure to invest in compared to other companies. It’s recommendable for beginners to begin investing in blue-chip stocks. As you gain knowledge and experience, you can begin investing in mid-cap and small-cap companies.
4. Never invest in ‘FREE’ tips/advice
This is the biggest reason why people lose their money in the stock market. They do not carry sufficient research on the shares and blindly follow their friends/colleague’s suggestions and advice.
The stock market is very dynamic and its stock price and circumstances change each second. Maybe your friend has bought that stock when it was underpriced, however now it’s buying and selling at a higher price range. Maybe, your friend has a special exit method than yours. There are some factors involved here, which may end up with you losing the money.
Avoid investing in tips/advice and do your personal study.
5. Avoid blindly following the crowd
I know a range of people who have lost money by blindly following the crowd. One of my colleagues invested in a stock simply because the stock has given a double return to another of my college in three months. He ended up losing Rs 20,000 in the market simply due to the fact of his blind investing.
6. Invest in what you recognise and understand
Will you purchase ABC company which produces Vinyl sulphone easter and dye intermediates even though you have zero information about the chemical industry?
If you will, then it’s like giving some stranger a one lakh rupee and awaiting him to return the cash with interest. If you are lending cash to someone, you ask a number of questions like what he does, what is his salary, what is his background, etc. However, while investing Rs one lakh in a company that humans do not understand, they neglect this common logic.
7. Know what to expect from the market
Do not set unrealistic expectations for the share market. If you want to make your cash double in one month, from the stock market, then you have set your expectations wrong. Have a logical expectation from the market.
People are joyful with 4% simple interest from the savings account. however, a return of 20%
in a year sounds underperformance for them.
8. Have self-discipline and follow your plan/strategy
Do not get distracted if your portfolio begins performing too nicely or too awful in the first few months of investing. Many people expand their investment amount simply in a few weeks if they see their stock doing too well, and end up losing in the lengthy run.
Similarly, many people exit the market quickly and are not able to get earnings when their shares begin performing. Have self-discipline and follow your strategy.
9. Invest regularly and constantly increase your investment amount
The stock investment offers great returns when you invest for the long term. Do not invest in a lump sum at just one time and wait for the next 10 to 20 years to see how much returns you get. Invest regularly whenever you get the right opportunity. Further, increase the investment amount as your financial savings increase.
10. Continue your education
Keep studying and keep growing. The stock market is a dynamic place and modifications continuously. You can only keep updated with the stock market if you also continue your education.
Besides, there are a number of more lessons which you will examine with time and experience.
That’s all for this article on how to invest in the share market. I hope this is useful to the readers. Take care and be completely happy investing.