One of the best ways to create sustainable wealth is to invest in stock market. Yet according to popular estimates, even today, only a tiny proportion of people in India invest in stock market.
A major reason for this can be attributed to the lack of awareness about how to invest in stock market the right way. Other reasons for not investing in the stock markets include the many myths associated with stock markets and the fear arising out of the high-risk factor related to equities.
Before we proceed to take a look at the process to invest in stock market, let’s first understand what is the meaning of stocks and the stock market.
What are stocks?
Stocks also referred to as equities are securities that indicate the fractional ownership of a business or a corporation. Depending on the number of stocks owned by a person in a corporation, the owner of the stock is entitled to a proportion of the assets and profits of the corporation. Units of stock are known as “shares.”
Stocks are issued by companies to raise additional capital to expand their business. There are two types of stocks. Unlisted stocks and listed stocks. Listed stocks refer to the stocks which are issued by the company and listed publicly on the stock markets whereas unlisted shares are the shares of companies that are not listed on the stock exchange. While investors can buy and sell listed shares on stock exchanges, listed shares are traded through the over-the-counter (OTC) market.
Let’s understand this with the help of an example:
ICICI Bank is a publicly listed bank and hence investors can buy and sell shares of HDFC bank on stock markets. On the other hand, Capital Small Finance Bank is not publicly listed and hence its shares can be bought only through the over-the-counter market i.e., from investors who hold unlisted shares of the bank.
Now that you have understood the meaning of shares, let’s take a detailed look at other related terminologies.
Also known as the equity market, the share market refers to an aggregation of buyers and sellers who indulge in activities of buying, selling stocks regularly through institutionalized formal exchanges operating under a defined set of regulations.
There are several intermediaries in the share market who are responsible for the transfer of shares to the buyers and the transfer of money to the sellers.
Equity investment is now quite easy and can be done online in a few clicks or even on your smartphone instantly.
What is a stock exchange?
A stock exchange is a marketplace, where shares, debentures and bonds issued by companies
are traded and play a vital role in creating liquidity for financial securities. Securities trading on stock exchanges, are executed on the basis of order matching algorithms, where best sell orders are matched with best buy orders.
What is meant by primary markets?
The primary market refers to the market where shares of a company are issued publicly for the first time through an initial public offering (IPO).
What is meant by secondary markets?
The secondary market refers to a market where shares of companies already listed on stock exchanges are traded among investors. In secondary markets, investors can freely buy and sell shares without the intervention of the company which issued the shares. In secondary markets, the valuation of a share is based on various parameters such as the company’s performance and demand and supply in the market.
How to invest in Stock Market? Stock market guide for beginners
Checklist of required things at a glance
- Bank account
- Aadhar card
- PAN card
- 2 passport size photos
- Bank statement
- Cheque with your name mentioned on it
- Trading and Demat account with a stockbroker
It is mandatory to sign up with a stockbroker for opening a trading account which will help you to buy and sell shares in the stock market. The stockbroker will also help you in opening a Demat account with either CDSL or NSDL, the only two depository services currently available in India. To open the account with the stockbroker, you will need to keep documents such as PAN, Aadhar, 2 passport size photos, and a canceled cheque ready.
Why it is important to invest in stock market?
Traditionally Indians have preferred investing in gold, real estate, fixed deposits, post-office deposits, Kisan Vikas Patra (KVP), and PPF because that is what their previous generations have been doing and advising them to do. All these traditional investments were justified decades back as interest rates were high, and awareness about equity investments was too low.
Times have changed now. Interest rates are on a decline making small savings like bank deposits, post-office deposits, and PPF less attractive. There is no doubt that these instruments carry less risk as compared to equity, but then are inadequate to beat inflation.
For example considering the current rate of inflation at 4%, when you invest in a bank fixed deposit that offers 6% interest per annum, the real rate of return that you get on your investment is just 2% (6-4%).
Real estate too has lost its sheen over the last four years, especially post the government’s demonetization drive of high-value currency notes in the year 2016. Property prices have become stagnant. In fact, according to recent estimates, the number of unsold inventories in real estate properties remains at an all-time high in cities such as Mumbai, Delhi, and Bengaluru. All this has made an investment in real estate unattractive.
In such a scenario, equity is one of the best investment options as it can not only beat inflation but also generate double-digit returns in the long run.
Things to keep in mind before you invest in stock market
Do your homework
Given the risk factor associated with stock markets, it is highly recommended to do your homework in detail by reading as much as possible on how stock markets work and why stock prices move up and down.
Define your investing goals
When you invest in stock market, you must have clearly defined goals. It is important to set realistic goals. Goals like earning 50-100% returns on your investment in the short term may be too unrealistic while the same expectation over a long-term period is definitely possible when you invest in good quality stocks.
Stay away from the news, rumors, and stock tips
It can be tempting to invest in stock market based on news, rumours, and stock tips from random sources which promise high returns in a short duration. However, due to the lack of creditability behind these generic sources, most investors end up making losses. Hence it is very important to stay away from stock market news, rumours, and stock tips and instead only based on thorough research.
Keep your emotions away from investing
While stock prices are driven by news or demand in the short term, it is always the fundamental strength of a company that drives its share price upwards in the long run. So rather than investing based on emotions or sentiments, one should always invest in stock market after detailed research.
Knowledge is the key to success when you invest in stock market
The best way to start would be by reading books on equity investment written by successful investors such as The Intelligent Investor by Benjamin Graham and ‘Common Stocks and Uncommon Profits by Philip A. Fisher.
To find details of a company’s financials one can visit the company’s website and check out the company’s annual reports. Thorough research from your side will ensure that you don’t fall for the pitfalls of equity investing.
Don’t hesitate to seek expert help if necessary
According to legendary investor Warren Buffett, one does not require an extra-ordinary IQ to become a successful investor. Even a person with normal common sense and some patience can achieve exceptional success in the stock market. Yes, maybe it necessary to spend some time researching the company’s financials. However, if you think all this looks too difficult or time-consuming, you may consider availing the services of a professional equity advisory service. For expert help, click here.