In this guide, we share basics of share market for a beginner to start investing in stocks. Know about types of markets, how to open a DEMAT account & buy your first stock
What is a stock?
Stocks are a way to become a partner in companies by investing a specific amount. If there are 100 shares in the market of a specific company and you own 5 of them then you have 5% of ownership in that company. Here in this article, we will try to simplify things and mention some of the key aspects which needs to be known and discuss how to start investing in the share market.
Investing is to make your money work which you earned. Warren Buffet defines investing as “the process of laying out money now in the expectation of receiving more money in the future”.
Although Investing also has the risk of losses. Investing helps the person to gain control over time through earning returns on them because not having control of your time is a very powerful and universal drag on your happiness. The ability to do what you want, when you want, with who you want, for as long as you want, pays the highest dividend that exists in the field of finance.
Out of 1.36 billion population of India, only 3.7% invest in equities. It is very less in comparison to many developed countries. So, start investing in stocks after gaining proper knowledge and go through this article to know how to start investing in the share market.
There are various ways to invest in stocks. One can invest in mutual funds which eventually leads to investing in stocks like Mutual funds, ETFs, etc. The other possible way is to directly invest in stocks with your own money.
There are two types of Share Markets, lets understand them first before we get in to how to start investing in share market.
A. Primary Share Market
This is the market where securities are created and traded for the first time. Here new bonds and stocks are sold through Initial Public offering (IPO). Investors have a chance to buy the shares at the issuing price by filling up the IPO form. Shares will be allotted on the basis of number of overall applications (IPO subscriptions), completeness of your application, and random allocation process.
B. Secondary Share Market
Once the stock is listed, shares are available for all to trade and can be done through Secondary Share market. This is the market where active buying and selling of shares take place. Here we will talk about how to start investing in the stock market, for the same one must know following 8 things:
1. Demat/ Trading Account
Demat account is the place where shares are stored after buying and trading account is where shares are traded, if bought then shares gets credited in Demat account and if sold then gets debited from Demat account.
Steps to be followed to open a Demat account:
a. Shortlist brokers: Discount brokers are ideal for investors who are looking to hold equity for long term
b. Compare brokerages & services provided by them
c. File account opening & KYC form required for the selected broker
d. Wait for application verification (Time taken by the broker)
e. Recieve account details and start purchasing & selling of stocks
These are the steps that are needed to be followed to start buying/selling of shares. Zerodha is the biggest broker in India. These are the brokers for the investors who want an active hand in managing their investments. Check the charges for intraday trade and delivery of different brokers.
2. Types of Share Holding Positions
a. Long Position: When people buy shares, they are considered to be holding the shares in long position. This type of position is taken by an investor when he/she thinks a particular share price is going to increase over time or we can say an investor is bullish on a particular stock. In this, buying of shares is done first followed by selling of shares.
b. Short Position: This type of position is taken by an investor when he/she thinks a particular share price is going to decrease over time or we can say the investor is bearish on a particular stock. When investors enter in short position, selling of shares is done first followed by buying of shares to close the transaction.
3. Types of Investors
Before buying/selling stocks determine the type of investor you are. Based on that stock selection should be done. There are few types of an investor like short term, long term and also one who trades on an intraday basis which are called traders. Some are speculators who want to earn big profits in a short duration of time. They majorly trade based on the announcement or some news. There is a thick line between investing & trading which everyone needs to understand before starting to invest in stocks.
4. Diversification of Risk
It is a technique used to reduce risk by allocating investments in different financial vehicles or instruments like different assets and also in different securities in those assets. Diversification is a must while investing in stocks. It can help you to stop blunders. One can buy different stocks in different sectors. During lockdown, hotel industries were affected badly in 2020 but the Fast-Moving Consumer Sector (FMCG) was booming. So, never put all your eggs in one basket and diversify your investment.
Mutual Funds give best diversification although few mutual funds are focused on one sector. That type of funds are for the people who are ready to take high risks and can expect high rewards from it. Over diversification is also harmful, an increase in the number of stocks after a certain limit will be also harmful to your portfolio.
5. Don’t Invest Borrowed Money
Start investing in the stock market with your own earned money. Never take leverage to invest in the stock market at the beginning of your investment journey. Be happy with the money you make with your investments. This borrowed money will look good in booming markets but the same would lead to anxiety when the markets move down. Always try to understand the risk-reward ratio for every investment you make.
6. Avoid Herd Mentality
Many investors invest in shares based on tips received from friends, relatives, or neighbors without researching on their own. The Dotcom bubble of the late 1990s and early 2000s is a prime example of investing with herd mentality. People turn from investors to speculators during such times. Different people have different expectations, different goals, different risk-taking capacities. So, one should research on their own and invest according to their risk appetite. Warren Buffett, one of the top investors of the world said one should invest in stocks which they understand and avoid which they don’t.
It is important to know the taxes applicable on the profits you made by investing in stocks before you start investing. There are two types of taxes applicable:
a. Long Term Capital Gains Tax: Here long term means share holding period of more than 1 year. If a person sells the stocks after 1 year and earns more than a profit of 1 lakh then he/she has to pay 10% tax on the absolute return (profit) amount greater than 1 lakh.
b. Short Term Capital Gains Tax: Here short term means share holding period of less than 1 year. If a person sells the stocks before 1 year then he/she has to pay 15% of tax on the earned profit.
8. Never Try to Time the Market:
Being an investor, one should never try to time the market rather than that they should focus on time in the market (If you are a trader then it’s a different thing). There are numerous examples where many people get out of the stock because of low returns or due to losses, but you never know when stock will give a positive breakout. Warren Buffett started investing when he was 11. He is currently 90 years old and nearly 85% of his wealth was created after his mid-60’s. Being a long-term investor will help you to earn more returns.
Sensex was at 39,889 and after that, it fell drastically due to covid-19 and went up to 35% in discounts in March 2020 to around 26,000. Sensex was at 52,925. If a person who was invested in markets, had to just sit quietly with patience during the fall due to covid-19. He/she would have earned nearly 30% of returns in one year. The stock market always rewards you for your patience.
These are the few points to know about how to start investing in the share market. This is an introductory level of things to start investing in stocks for a beginner.