HOW TO INVEST IN SHARE MARKET

I have been planning to write this blog for a number of days as there are many people who are willing to invest, however, do not know how to invest in share market,also,I have got good response for my previous blog "The Language Of Stocks". If you haven't read that then, [click here] .

Through this blog, I will talk about the process of how a beginner can start investing in indian share market.Please note that this blog might be a little longer as I am trying to cover all the basics that a beginner should know before entering the stock investment world. Make sure that you read the blog till the end, cause it will be definitely worthwhile reading it. Let’s get started.

Pre-requisites before you start investing:

For investing in the Indian stock market, there are few pre-requisites that I would like to mention first. Here are the few things that you will need to invest in share market:

Bank Savings account
Trading and Demat account
Computer/laptop/mobile
Internet connection

For opening a demat and trading account (usually opened altogether and called 2-in-1 account), the following documents are required:

PAN Card
Aadhar card (for address proof)
Cancelled cheque/Bank Statement/Passbook
Passport size photos

You can have your savings account in any private/public Indian bank.

Where to open your trading and demat account?– This will be discussed later in this blog on the section ‘choose your stock broker’

Get your documents ready. If you do not have a PAN card, then apply as soon as possible (if you are 18 years old or above).

BASIC ADVICE BEFORE YOU START INVESTING:

When you are new to the stock market, you enter with lots of dreams and expectations. You might be planning to invest your savings and make lakhs in return.

Although there are hundreds of examples of people who had created huge wealth from the stock market, however, there are also thousands who didn’t.

Here are a few cautionary points for people who are just entering the world of investing:

=> Invest Only Your Additional/Surplus fund

Stop right there if you are planning to invest your next semester tuition fee, next month flat rent, which is going to happen next year or any similar reasons.

Only invest the amount that won’t affect your daily life. In addition, investing in debts/loans is really a bad idea, especially when you are new and learning how to invest in the share market.

=> Keep Some Cash In Hand

The cash in hand doesn’t just serve as your emergency fund. It also serves as your key to freedom. You can take big steps like changing your little flat, or quit your annoying job or simply shifting to a new city, only when you have cash in hand.

Do not get trapped by investing all your money and later losing your freedom. Do not sacrifice your personal freedom in the name of financial freedom.

Now that you have understood the pre-requisites and the basics, here are the seven steps to learn how to invest in share market on your own. Do follow the step sequences for an easy approach to enter the stock market world.

How to invest in share market?

Step 1: Define your investment goals

It’s important to start with defining your investment goals. Start with end goals in mind. Know what you want.

Do you want to grow you saved money (capital appreciation) to beat inflation and get higher returns? Do you want to build a passive income from your investments through dividends? Are you investing for a specific goal? Or do you just want to have fun in the market along with creating wealth?

If you want to just have fun and want to learn, that’s okay. But make sure that you do not over-invest or get too much attracted to the market? Moreover, most people start the same way and define their goals later.

Anyways, if you are starting for Goal-Based Investing, do remember that the time frame for different investment goals will be different. Your goal 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 bigger time frame compared to if you are investing in buying your first house.

When you know your goals, you can decide how much you want and for how long you have to remain invested.

Step 2: Create a plan/strategy

Now that you know your goals, you need to define your strategies. You might need to figure out whether you want to invest in the lump sum (a large amount at a time) or by SIP (systematic investment plan) approach. If you are planning small periodic investments, analyze how much you want to invest monthly.

There’s a common misconception among our society that you need large 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 start allocating a fixed amount let’s say 10-20% of your monthly income to save and invest. You can use the remaining portion of your earnings for paying your bills, mortgages, etc. Nevertheless, even if your allocated amount turns out to be Rs 3-5k or more, it’s good enough to build an investing habit.

Step 3: Read some investing books.

There are a number of decent books on stock market investing that you can read to brush up the basics. Few good books that I will suggest the beginners should read are:

Besides, there are a couple of more books that you can read to build good basics of the stock market.

Step 4: Choose your stock broker

Deciding an online broker is one of the biggest steps that you need to take. There are two types of stockbrokers in India:

Full-Service Brokers (Traditional Brokers)

They are traditional brokers who provide trading, research, and advisory facility for stocks, commodities, and currency. These brokers charge commissions on every trade their clients execute. They also facilitate investing in Forex, Mutual Funds, IPOs, FDs, Bonds, and Insurance.

Few examples of full-time brokers are ICICIDirect, Kotak Security, HDFC Sec, Sharekhan, Motilal Oswal, etc

2. Discount Brokers (Budget Brokers)

Discount brokers just provide the trading facility for their clients. They do not offer advisory and hence suitable for a ‘do-it-yourself’ type of clients. They offer low brokerage, high speed and a decent platform for trading in stocks, commodities and currency derivatives.

A few examples of discount brokers are Zerodha, ProStocks, RKSV, Trade Smart Online, SAS online, etc.

I will highly recommend you to choose discount brokers (like Zerodha) as it will save you a lot of brokerage charges.

Zerodha (a discount broker) charges a brokerage of 0.01% or Rs 20 (whichever is lower) per executed order on Intraday, irrespective of a number of shares or their prices. For delivery, there is a zero brokerage charge in Zerodha. Therefore, the maximum brokerage that you’ve to pay per trade while using the Zerodha platform is Rs 20 and it doesn’t depend on the volume of trading.

This is way cheaper compared to ICICI direct (full-service broker) which asks a brokerage of 0.55% on each transaction. If you buy stocks 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 stock for more than one day in your demat account.

Further, as this amount is charged on both sides of the delivery transaction (buying & selling), hence you have to pay a total of Rs 550 for the complete transactions in ICICI direct (way too expensive than Zerodha).

In short, if you are planning to open a new trading account, I would recommend opening accounts in a discount broker so that you can save lots of brokerages.

Step 5: Start researching common stocks and invest.

Start noticing the companies around you. If you like the product or services of any company, dig deeper to find out more about its parent company, like whether it is listed on the stock exchange or not, what is its current share price, etc.

Most of the products or services that you use in day to day life — From soap, shampoo, cigarettes, bank, petrol pump, SIM card or even your inner wears, there is a company behind everyone. Start researching about them.

For example- if you’ve been using HDFC debit/credit card for a long time and satisfied with the experience, then investigate further about HDFC Bank. The information of all the listed companies in India is publicly available. Just a simple ‘Google search’ of ‘HDFC share price’ will give you a lot of important pieces of information.

Similarly, if your neighbour bought a new Baleno car lately, they try to find out more about the parent company, i.e. Maruti Suzuki. What other 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 stocks with hidden gems. Start with the popular large-cap companies. And once you are comfortable in the market, invest in mid and small caps.

Step 6: Select a platform to track your performance

You can simply use an excel or google spreadsheet to track your stocks. Make a spreadsheet with three tables containing:

The stocks that you are interested in and need to study/investigate
Those stocks that you have already studied and found decent
Miscellaneous stock- for the other stocks that you want to track.

This way, you can easily follow the stocks. Further, there are also a number of financial websites and mobile apps that you can use to keep track of the stocks

Step 7: Have an exit plan

Its always good to have an exit plan. There are two ways to exit a stock. Either by booking profit or by cutting a loss. Let’s discuss both these scenarios.

Basically, there are only four scenarios when you should sell a good stock in your portfolio:

When you badly need money
when the stock fundamentals have changed
When you find a better investment opportunity
When you have reached your investment goals.

If your investment goals are met, then you can exit the stocks happily. Or at least, book a portion of the profit from your stock portfolio and shift it to other more safer investment options. On the other hand, if the stock has fallen under your risk appetite level, then again exit the stock. In short, always know your exit options before entering.

Additional points to take care

Start small

Do not put all your money on the market in the beginning. Start small and test what you have learned. You can start even with an amount of Rs 500 or 1000. For the beginners, it’s more important to learn than to earn.   You can invest in a large amount once you have more confidence and experience.

2. Diversify your portfolio

It’s really important that you diversify your portfolio. Do not invest all in just one stock. Buy stocks from companies in different industries.

For example, two stocks of Apollo Tyres and JK Tyres in your portfolio won’t be called as a diversified portfolio. Although the companies are different, however, both companies belong to the same industry. If there is a recession/crisis in tyre sector, then your entire portfolio might be in RED.

A diversified portfolio can be something like Apollo tyres and Hindustan Unilever stocks in your portfolio. Here, Apollo Tyres is from Tyre industry and Hindustan Unilever is from FMCG industry. Both the stocks are from different industry in this portfolio and hence is diversified.

3. Invest in blue-chip stocks

Blue chips are the stocks of those reputed companies who are in the market for a very long time, financially strong and have a good track record of consistent growth and returns in the past many years.

For example- HDFC banks (leader in the banking sector), Larsen and toubro (leader in the construction sector), TCS (leader in the software company), etc. A few other examples of blue-chip stocks are Reliance Industries, Sun Pharma, State bank of India, etc.

These companies have stable performance and are very less volatile. That’s why blue-chip stocks are considered safe to invest compared to other companies.

It’s recommendable for beginners to start investing in blue chips stocks. As you gain knowledge and experience, you can start investing in mid-cap and small-cap companies.

4. Never invest in ‘FREE’ tips/advice

This is the biggest reason why people lose money in the stock market. They do not carry enough research on the stocks and blindly follow their friends/colleague’s tips and advice.

The stock market is very dynamic and it’s stock price and circumstances change every second. Maybe your friend has bought that stock when it was underpriced, however now it’s trading at a higher price range. Maybe, your friend has a different exit strategy than yours. There are a number of factors involved here, which may end up with you losing the money.

Avoid investing in tips/advice and do your own study.

5. Avoid blindly following the crowd

I know a number of people who have lost money by blindly following the crowd. One of my colleagues invested in a stock just because the stock has given double return to another of my college in 3 months. He ended up losing Rs 20,000 in the market just because of his blind investing.

6. Invest in what you know and understand

Will you buy ABC company which produces Vinyl sulphone easter and dye intermediates even though you have zero knowledge of the chemical industry?

If you will, then it’s like giving some stranger 1 lakh rupee and expecting him to return the money with interests. If you are lending money 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 1 lakh in a company which people do not understand, they forget this common logic.

7. Know what to expect from the market

Do not set unrealistic expectations for the stock market. If you want to make your money double in one month, from the stock market, then you have set your expectations wrong. Have a logical expectation form the market.

People are happy with 4% simple interest from the savings account, but a return of 20% in a year sounds underperformance for them.

8. Have discipline and follow your plan/strategy

Do not get distracted if your portfolio starts performing too well or too bad in the first few months of investing. Many people increase their investment amount just in few weeks if they see their stock doing too well, and end up losing in the long run.

Similarly, many people exit the market soon and are not able to get profits when their stocks start performing.Have discipline and follow your strategy.

9. Invest regularly and continuously increase your investment amount

The stock investment gives the best returns when you invest for the long term. Do not invest in lump sump at just one time and wait for the next 10 years to see how much returns you got. Invest regularly whenever you get a good opportunity. Further, increase the investment amount as your savings increase.

10. Continue your education

Keep learning and keep growing. The stock market is a dynamic place and changes continuously. You can only keep up with the stock market if you also continue your education.

Besides, there are a number of more lessons which you will learn with time and experience.