The moment we think about Shares, the obvious question does arise we have to invest a large amount but the tagline is that you do not need a big amount of investment to start investing in the stock market!
In general, investors invest in the stock markets, keeping in mind the enticement of earning good returns, which always attracts investors to step in. But it is important to understand that while you can make big bucks in stock markets, you can also lose a lot of money in the markets if you are not careful while investing or trading in the markets.
Apart from patience and discipline, you require a good amount of research and understanding in order to make money from the stock markets.
General Rule
Also, you do not need a big amount of investment to start investing in the stock market. As a beginner, it makes more sense to start with a small amount and increase your investment amount gradually as you gain more understanding of the market behaviour and learn to analyse stocks.
As we are talking about the stock market, first and foremost, the common people should know about this.
What is a stock market?
A Stock Market is a marketplace where you buy and sell shares. In India, you cannot buy and sell shares directly in the share market all by yourself. Hence, you will have to buy or sell shares through registered stock brokers.
There are many share brokers in India through whom you can invest and trade in the stock market. However, the services and service charges of the brokers vary. You will need to know how to select the right broker for yourself.
It is pertinent to get an overview, of how one should go to choose the brokers.
The Overview of the Indian Stock Markets
In India, there are primarily two stock exchanges namely: The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Apart from these two, there are a few national and regional stock exchanges. However, most of the trading happens through NSE and BSE.
It is assumed that 80 percent of the trading takes place at the NSE and BSE only. They both are almost similar in terms of daily traded volume and most of the key shares have been listed on both the exchanges so that the investors can buy from any of them.
Here, the transactions in shares are done through online computerised systems. The trading system of BSE is known as BOLT (BSE Online Trading) and that of NSE is known as NEAT (National Exchange Automated Trading).
As compared to the earlier systems of traditional offline trading, the online trading system has facilitated the traders with more transparency, efficiency, automatic order matching, and speedy processing of the transactions.
When we are talking about shares or stocks, we should know the details about them. What are Shares or Stocks?
Every company needs money to carry on its operations. For that purpose, companies reach out to banks or investors for loans and to borrow money from common people by issuing bonds. But, in both cases, the company must pay a huge amount of interest. So, to avoid huge costs of interest, companies can raise money from the market by issuing its share to the public with no obligation of paying interest.
A share issue involves selling a part of the company to people or institutions who have money to invest. When you buy a share, you get shares and have to give your money. The company gives the share to you and gets the money.
Why should you invest in shares?
By investing your money in shares, you will get ownership of the company. The percentage of ownership will be proportional to the number of shares you bought. This will also entitle you to receive dividends, i,e, a share in the profits which the company earns by doing business.
Apart from dividends, shareholders also enjoy capital appreciation. The share prices of the company increase as the company’s profit grows. Hence, you can sell your shareholding at a price greater than the purchase price and earn a profit.
What are the prerequisites to start trading in Share Markets in India?
Pan Card
You need to have a Permanent Account Number (PAN) to do any financial transaction in India. It is required for opening a bank account, making investments, filing income tax returns, etc. It is a unique number assigned by the Tax authorities to an individual for assessing his tax liabilities in all financial transactions.
Bank Account
You also need to have a bank account for all transactions in the share market;
Broker
As mentioned earlier, no transaction in the share market can be made by you directly in the stock exchange. You need to open a share trading account with a broker who is registered with SEBI and the stock exchanges.
ICICI Direct, Sharekhan, Axis Direct, etc. are some of the popular share brokers in India.
Get a Demat and trading account
Apart from the Bank Account, you will need to open a Demat Account wherein you can hold all your shares and securities in your name. Nowadays, you cannot hold share certificates. Hence, having a Demat Account is necessary to hold all your securities in an electronic (dematerialized) form. You will also need a trading account for buying and selling the shares.
Generally, all this is taken care of by the broker. So, once you approach a broker, your Demat account and trading account are also opened simultaneously.
How to select a good broker?
Here are the tips to select the right stock broker for yourself:
Conduct an extensive research
Firstly, you need to carry out thorough research about various brokers based on the reviews of their customers. It is important since the broker will be the one who will be responsible for providing various investment services to you and will also help you to place orders for buying or selling shares.
Having a good broker will ensure that you have a good experience of transacting in the stock market. A broker with good customer service will make sure they provide you with great service, and most importantly, execute your order on time.
Offers multiple investment options
You can invest in various other financial products other than shares in the share market. These include mutual funds, futures, and options, etc. Your stock broker should give you access to these investment products so that you do not have to go elsewhere to buy these.
Quality of services provided
If you decide to go with an online broker, then you need to make sure that their website works efficiently. Also, the website should be able to handle huge traffic during peak hours. There is no doubt that technical difficulties might arise sometimes. So, your broker should provide you with an alternative option to place your orders during those times. Moreover, they should offer this facility at no additional cost.
Extra services
Apart from just managing your portfolio and providing share trading services, your online broker may sometimes provide advisory services too. They should provide you with good recommendations so that you know what to share to trade and what not. They should also keep you updated with the market sentiments and how it will affect the various industries. This helps you in better and more informed decisions while trading in the market.
Full-service brokers or discount brokers
Now, if you are new to share markets, then it is advisable that you should go with a full-service broker. A full-service broker makes sure to advise you on each and every transaction you make in the stock market. They assist you in every possible way and guide you to transact successfully in the share market.
Gradually, when you become accustomed to trading in the share market, you can opt for discount brokers and invest your money yourself. They do not offer any other help apart from just executing your trades. Even though the full-service brokers charge you a higher commission, still it is better to go with them for limiting your losses in the initial days of trading.
Understanding the Online Trading Platforms
Online trading platforms allow you to trade via the internet by using the trading software provided by the broker.
As a beginner, the trading platform might confuse you, but it is essential to have a thorough understanding of the trading platform so as to efficiently use the various tools provided by these platforms. You can even transfer your funds from your bank account to your share trading account instantly with just a click of a mouse.
Features of an online trading platform:
Provides access to various online tools to perform technical analysis of stocks
You can have full and direct control over his portfolio
You can trade on both the markets i.e. NSE and BSE simultaneously by using the same account
Keeps you informed about the latest market news and movements
Trading happens fast and without any significant delay
Getting started with the online trading platform:
User ID and password
Your online trading account is protected by a login ID and password. The login ID is provided by the broker and the password needs to be set up by you. You should change your password frequently for the safety of your account. Also, make sure to opt for additional security measures available for your account so as to ensure the safety of your account.
Indices display
The online trading platform will also display the market indices at an appropriate location on your screen. This helps you to know the movements in all the indices primarily Sensex and Nifty. In most platforms, you will be able to customise the screen to display all the indices you want to follow. This helps the investors in getting an overall insight into the market sentiments so as to execute their trades accordingly.
Reports
At any time, you will be able to access various reports related to your market activities. These reports include the order book, trade book, margin, net positions, exercise book, and portfolio. Even, these reports are dynamically updated as soon as any transaction is executed without any need of refreshing them. You can perform various trading actions in the reports themselves. These reports can be saved offline as well in a text or CSV format.
Buying and selling of shares using various types of orders
You can easily buy and sell shares using an online trading account. There are various types of orders that can be placed in the market. You need to understand all the orders before you start buying and selling the share.
Here are the features of the various types of orders available:
Limit orders: In this type of order, you need to specifically enter the price at which you want to buy or sell the share. You will get an option to notify whether you are placing the market or limit. If you decide to place a limit order, then you will have to expressly enter the price of your choice.
Market orders: In the case of a market order, you do not enter a specific limit price. Instead, you can get the order executed at the current price that is prevailing in the market at the time of the trade.
Stop loss order: In a stop loss order, you need to enter a price to trigger the order. So, such orders are activated once the trigger price mentioned in the order is reached or surpassed. This order helps in minimising the loss to a pre-determined amount. Such orders are always placed in pairs. Firstly, you need to place the normal order i.e. market or limit order and then, a stop loss order to restrict the maximum loss. For example, if you place an order to buy a stock at Rs. 100 and do not wish to take a loss of more than Rs. 2, then you can place a stop loss order to sell the share at 98.
IOC orders: IOC stands for 'Immediate Or Cancel'. In this case, you place an order with the intention to get it executed instantly otherwise the order is cancelled. If the order gets partially traded, then the remaining part of the order gets cancelled automatically. You cannot place the stop loss order as IOC orders. Only normal orders can be placed as IOC.
Things to keep in mind while placing a buy or sell order
Quantity box: You need to necessarily fill the quantity box while placing an order. The quantity in the share market is generally in lot size but most of the shares generally have a lot size of 1. Make sure to enter the correct quantity in the box to avoid any errors.
How to start investing in Stock Markets?
Remember that not all stocks are good for investing. Some are overvalued and some may have weak fundamentals or any other issue. So, as a beginner, it is important to learn how to evaluate the stocks and pick the right ones for yourself.
You must know how to identify the shares that can help you earn some profits either in terms of dividends or capital appreciation through stock analysis. A little bit of knowledge and practice will make things easier for you.
Firstly, you need to learn how to read the financial statements of a company. It represents the financial position of the company. The objective is to invest in only fundamentally or financially strong companies. Ideally, the investors will be more interested in investing in the companies with higher profits since it means that the company will pay higher dividends. But, some of the companies instead of sharing profits as dividends might retain it for expansion and growth. But, this eventually helps the company to earn even higher profits in the coming years.
These are just two indicators. There are many other tools such as dividend yield, current ratios, long-term debt ratios etc. that can help you in making an informed decision.
Understanding Brokerage
The cost associated with the buying and selling of shares is called the brokerage. To have a clear understanding of this, you need to first understand the concept of intraday and delivery trading.
In Intraday trading, you buy and sell shares on the same day, and earn a profit or loss from the difference in the price at which you transacted. Since you buy and sell within the same day, you don't carry forward any shares, and no share enters or leaves your demat account. Due to this, brokerage charges for intraday trading are generally quite low.
However, in delivery trading, the position is not closed on the same day and the shares are bought and kept in the Demat account. The shares can be held for a number of days, months or even years until you reach your target price, Generally, the trading cost in India includes the brokerage, securities transaction tax, stamp duty, service tax and some other charges.
Understanding Capital Gains Tax on Share Trading
Capital Gains Tax is yet another important aspect associated with share trading. There are basically two types of capital gains tax: short-term capital gains tax and long-term capital gains tax.
In the case of investments in shares, if you sell a stock after one year of buying the share it is considered a long-term investment and there is no income tax on the long-term capital gain on selling of shares. Hence, it is more beneficial to hold your investment in shares for more than a year and earn maximum profits.
Whereas in case if the shares are sold within one year of buying then, it is considered a short-term investment and it is chargeable to income tax at a flat rate of 15% irrespective of the tax slab in which you fall. This applies only on the delivery trading, in the case of intraday trading, investors need to pay taxes on the basis of normal slab rates applicable to them.
Stock Edge
Since you are new to investing in the market, you can take advantage of the Stock Edge mobile app. You can simply download this app on your phone and learn about the market movements, the latest financial information of all the listed companies, technical analysis and derivatives on the go.
By providing complete trading resources under one platform, this is a perfect app for investors, traders as well as analysts.
Conclusion
This is a fair idea of how to start investing in shares. Generally, this has given you a basic idea about what stock markets are, how they function, and how to look for good stocks to invest in.
However, this is just the beginning, and you will have to go deeper into the various concepts and techniques related to the markets.
One can continue learning by gathering knowledge about:
- Fundamental Analysis
- Technical Analysis
- Futures And Options
- Wealth Management
- Currency and Commodity Markets
