Part 1:- How to Invest in the Stock Market?
Investing in the stock market means buying fractional ownership of a company.
Companies sell their fractional ownership in small units. It is called Share/Stock/Equity.
The very first time when they sell these units, it is called IPO.
Any Indian can apply for these IPO.
And one of the ways to invest in the stock market is by buying IPOs of the company. The IPO market is called the primary market.
However, there is a chance that you won’t get share allocation during IPO.
But, we do have a secondary market where you can buy/sell shares. And in fact, it is more famous. When you hear keywords like Nifty, Sensex, and stock prices of different companies, it is all about the secondary market. Trading of shares/stock happens in the secondary market.
Summary:- You can invest in the Indian market by applying for IPOs or buying stocks of different companies.
Part 2:- Know about the Stock Exchange, Stock Broker, Depository and SEBI.
Now that you understand about IPOs and secondary market. Let us now understand who are the key participants in the stock market.
Exchanges:- NSE and BSE are famous stock exchanges (There are more but you don’t need to worry about them at all. Ignorance is bliss here). Company’s get listed here (IPO process). And after IPO, their shares/stocks trading happens on these exchanges.
Stock Brokers:- Exchanges appoint stock brokers. You need to open one trading account one of the brokers appointed by stock exchanges. Brokers will also help you with opening a D-mat account. (In the later part, I’ll explain the difference between D-MAT and trading accounts).
Depository:- NSDL and CDSL are two depositories in India. The way you deposit your money in Bank – You deposit your shares with depositories. When you open your Demat account, you are given a 16 digit DP id. This DP id is like your bank account number. So, every time you buy share/stocks, your stocks get deposited in your DP id (Demat id).
SEBI:- Consider SEBI as the grandfather in this stock market family. SEBI is the regulatory body. They make rules for the stock market in India. They will also safeguard your interest. You can complain about your broker to SEBI.
Summary:- Knowing these guys will clear your basic doubts about the stock marketing functioning.
Part 3:- What is a DMAT account and Trading account?
DMAT account is the account where you keep your shares. It gets opened with depository NSDL and CDSL. Your stockbroker will help you open one. You can have one or multiple DMAT accounts. It is identified as a unique 16 digit unique DP id.
The trading account is the account you open with a stockbroker to buy and sell shares/stocks. This is the first stepping stone towards your investment journey in the stock market. Again, you can have one or multiple trading accounts with one or many stockbrokers.
Summary:- You got two choices to open DMAT (either with CDSL or NSDL) account but 100+ options to select stock broker in India.
Part 4:- How to select the correct stockbroker in India?
It is important that you become wise than you get a straight answer from me here. So, instead of giving three-four names and favoring a few brokers, I would like to explain to you what are the factors you should consider before freezing one stockbroker for yourself.
Safety and security:- In financial services and banking business or anything related to money “safety” and “security” should be the first in the rank. So, one stockbroker must be trustworthy and ethical.
Costing:- Every time you buy or sell shares, the broker will apply a brokerage fee. Make sure your broker is not charging you a hefty brokerage fee. Anything between 0.10% to 0.20% is fine these days. Generally, brokers quote high brokerage to first-time investors but if you negotiate, they will reduce the brokerage for you.
Trading platform:- Ease of doing things is also critical. Fund transfer, buy-sell activity, different reports are few of the actions, you would be taking on the broker electronic platform. It is important that you take a good demo of their platform and website.
Client support:- For any company, providing support to the client is a cost to the company. But, one company must focus on this. You need to check if the client support process and client support teams of your stockbroker is friendly
Summary:- I have done my research and so i would recommend these 2 brokers to you
Zerodha – India’s leading discount brokerage and best broker. I have given a detailed overview why you should choose zerodha. Without stock broker you cannot start investing in stocks. Detailed review of Zerodha – Why Zerodha
Upstox – It is 2nd biggest discount brokerage in Indian Industry. And if you don’t like Zerodha than i would recommend this to you. Detailed review of Upstox – Click here
Part 5:- How much I should invest in the Stock market?
Now that you know the operational part and ready to invest in the Indian Stock Market, you will have one question how much to invest in it.
There are two approaches to it.
Approach 1:- Regular investing
Let’s say, you earn 100 Rs per month. But, you are able to save only 40 Rs.
If you are under the age of 35 yrs:-
You can invest up to a maximum of 20 Rs out of the saving of 40 Rs. Which is 50% of your savings. This is the maximum which I would like to advise. The minimum could be as low as 10% of your savings.
Between 35 Yrs to 50 years:-
You can invest up to a maximum of 13.5 Rs out of the saving of 40 Rs. Which is 35% of your monthly savings. This is the maximum which I would like to advise. The minimum could be as low as 10% of your savings.
Above 50 years:-
Anything between 10% to 20% of your monthly savings you can invest in the stock market.
Approach 2:- Lumpsum approach – net worth wise.
Your total net worth is the sum of all your investments – All your debt.
(FDs, PF, PPF, Real estate, Gold, Stocks, Bonds, savings) – total debt = Your net worth
So, calculate your total net worth and you can allocate up to a maximum of 30% in shares/stock. The minimum could be as low as 5%.
Summary:- It is you who knows you the best. Understand one thing that Stocks/shares are an investment in businesses. And businesses do fail. And, you may lose your money. So, define the risk properly before investing in the stock market and invest confidently in the long term. Invest only that much which you would not need in the near term. Invest to build wealth and not to make money.
Part 6:- When is the right time to invest in the stock market?
Well, I got a very simple answer to this. If you have made up your mind to invest, then today is the right time to invest.
Many people try to time the market. And, it is the most dangerous thing. If you are trying to do so, you are trying to forecast too many things. And it is not possible.
Even if you are a pro-investor. Don’t try to time the market.
Invest today and invest regularly. Invest when the market is on top, invest when the market is down and also invest when the market is neutral. Make a discipline on time interval. Once in a month or once in a quarter and stick to it.
Summary:- No one can answer this question with a specific timeline. So better to develop a discipline than to keep looking for the right time.
Part 7:- Where to invest? Which are the companies you should invest in?
Identifying good companies to invest can be a simple and complicated process. And, it will depend completely on the objectivity of your task.
When is it simple?
– If you are looking for safe investments with moderate returns, it can be simple to identify companies. Look for the list of Nifty 50 or Sensex 30 shares.
Nifty50 is a list of top companies in India from 13–14 different sectors. If you visit the NSE website, you can find this list. Look for companies which are not posting loses or having troubles in recent time. Select seven to eight different sectors which you also understand. Select one or two companies from each sector and start building your portfolio in a disciplined manner. There is a very high chance, you will get good returns.
When is it complicated?
-If you are looking to invest in companies at their early stage. At this stage, companies are trying to grow at a fast pace. They take the risk as well. And, if their growth plan works they give high returns to their investors.
For this, you have to develop an understanding of at least 3–4 sectors which will grow faster than the economy. Learn about the market size of the product. Competition and many more factors which impact the company’s performance in that sector. Learn about valuation in detail.
Few points are common to be it whatever approach you take.
a) Don’t invest in unethical companies. If you don’t find promoters and management of the companies ethical and honest, ignore them. Even when the company’s business will grow, they may siphon out the profits.
b) Don’t invest in loss companies. It doesn’t matter how discounted their share prices are looking now. A share which has come down to 50 Rs from 100 Rs, it may go down to 10 Rs as well.
c) Don’t invest based on tips and insider information. Most of the time this kind of news is propagated to offload shares of scammers.
d) Penny stocks – 2Rs, 4Rs, 10 Rs share price type of shares. Stay away from it.
Summary:- Make a rule of investing. This will safeguard you. Keep it simple. Invest in companies where you have worked, companies which products you use, companies which you think are making a difference in people’s life, companies which are contributing to the country’s economy.