How to invest in share market, when you are a beginner

You have learnt that stocks provides attractive returns and you want to know how to invest in share market. In this article, we walk you through the steps.

As you would find from this previous article, over a period of past 37 years in India, at constant purchasing power, stocks provided close to 20x returns on initial capital, while Gold offered slightly over 2x return, and FDs barely managed to beat inflation. It is essential to allocate a portion of your long term capital into equities to create wealth.

Pre-requisites

Before you can start investing in stocks, you need to open an account with a stock broker. To do that you need to have a few artefacts in place.

PAN card

Having a PAN card is a mandatory requirement for investing in India. It is required for KYC (know your client) procedure that market intermediaries are mandated to follow as per regulatory requirements.

Proof of address

In addition to PAN card, you must provide a valid proof of address. This could be a Government Id, such as Aadhar card or Passport, etc.

Savings bank account

You must have a bank account linked to your Demat and Trading account. When you buy shares, money is debited from your bank account and shares are credited to your Demat account.

Besides this, the government has mandated six-month bank statement along with a cancelled cheque, under the new rules to open a demat account. You also need to provide passport size photographs.

The account opening procedure varies from broker to broker, and you need to check with your broker for the exact procedure.

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How to invest in share market – opening an account with broker

Once you have the above artefacts ready, you can proceed to open account with a broker.

Selecting a stock broker

A stock broker is someone who buys and sells stocks (and other securities) for clients through a stock exchange (or OTC). Brokers charge a small fee for their service called ‘brokerage’.

There are 250+ stock brokers registered in India. You need to hire a broker that provides online trading account along with demat account and offers competitive brokerage rates.

You can find the list of top brokers in India here. This article should also help you in selecting a broker.

Open a demat and trading account

Once you have zeroed in on a stockbroker, the next thing you need to do is open a Demat and a Trading account.

As the shares are not given in the physical form anymore, the Demat account will hold your shares in digital or dematerialized form. Whenever you buy or sell shares in the share market, they will be credited and debited in and from your Demat account respectively.

While demat account will hold your purchased shares, you need to open a trading account with broker to uniquely identify your transactions with your broker. All your trades will be placed using your trading account, and the shares bought or sold will be credited, debited to your linked demat account.

Once you have a demat account and trading account created, you are set to place trade by calling up your broker.

Online trading

Most investors and traders today prefer to execute their transactions themselves using online interface that the brokers provide. For this you need to have an online user-id and password created. With majority of the large brokers this happens automatically at the time of creating your account. Make sure you know your user-id + password and check that you are able to login to the online trading platform (or mobile app)

Buying and selling shares

After all the formalities are done, you can start trading in the Indian share market and can buy or sell shares. For this, you have to tell your stockbroker the name of the company, the entry price and the total number of shares you want to buy.

Alternatively, to can place the trade yourself by logging in to the online interface that your broker provides

Dos and Don’ts for a beginner

The following do’s and don’ts can help you to start investing in share market as a beginner

Do’s:

  1. Always stick to market intermediaries that are registered with SEBI (Securities and Exchange Board of India)/Stock Exchanges.
  2. Make investment related decisions with due diligence, proper research and analysis.
  3. If you plan to leverage Stock Advisory or PMS service, ensure that the individual/entity is registered with SEBI

Don’ts:

  1. Don’t deal with brokers, sub-brokers intermediaries that are not registered with SEBI or the Stock Exchanges.
  2. Don’t blindly follow tips, herd mentality, media reports or speculations.
  3. Control emotions of greed and fear – don’t let it overshadow your wisdom.
  4. Don’t execute any documents without fully understanding its terms and conditions clearly.Try to avoid leverage, FNO and day-trading

Making money in stocks may not be as easy as it seems

While stock markets have provided attractive returns over long term in the past, for most individuals making money consistently by trading in stocks may not be easy. It is therefore important to know the various options available for investing in stocks, their pros and cons, to learn which one suits you best.

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Routes available for investing in equities

There are multiple routes available to investors:

  1. Direct equity investment: suitable for experienced investors, unless you are guided by a registered advisor
  2. Advisory Services: personalised guidance based on risk profile, while investor does the actual buying & selling
  3. Mutual Funds: enables small investors to invest in stocks, leveraging services of professional fund managers
  4. PMS Route: suitable for HNIs, minimum capital requirement varies, generally between 25L to 1 Cr
  5. AIF: suitable for HNIs. Minimum investment is 1Cr as per SEBI regulation for Cat-3 AIF
  6. Combination of the above

Pros & cons of the routes

Each of the investment routes mentioned have with associated costs, pros and cons.

Direct investing can be highly rewarding if one has the necessary knowledge, but it takes years to learn. If you want to invest yourself, start with small amount of money and read a lot of books. You can find an initial selection here.

For most individuals who do not have the knowledge or temperament to succeed through the direct equity route, investing through Mutual Funds, particularly through the systematic investing route (SIP) offers the most reasonable option.

However, Mutual Funds have their own limitations and associated costs. Costs varies from fund to fund, but for equity mutual funds, expense ratio could be up to 2.25% of the invested capital. For investors wanting to commit more than 5-10 lakhs in equities, alternative options may prove to be worth reviewing.

Advisory services tend to handle smaller AUM, hence, they can offer somewhat personalized service that Mutual Funds cannot. Additionally their investment universe can include under-researched small cap gems which MFs have either ignored or cannot commit meaningful capital into. Long term advisory services are often run by knowledgeable investors who have their own money invested in the same stocks they recommend. All these makes stock advisory services an attractive (and sometimes cost effective) alternative if your invested capital exceeds 5-10 lakhs or more.

If you want to leverage stock advisory service, feel free to check out our offerings here.

PMS and AIFs can also be meaningful alternative, but generally the capital commitment requirements are more. AIF cat-3 funds for example requires minimum capital commitment of 1Cr based on SEBI regulation. For PMS the minimum capital requirement varies from fund to fund, but generally not less than 25L

Conclusion

Equities have proven to be the most rewarding asset class over long term. Hence it is essential to have a portion of your assets invested in stocks.

In this article we discussed how to invest in share markets, beginning with selecting a stock-broker and steps to open an account.

Although stock markets have provided attractive returns in past, making money in stocks may not be easy for most individuals. In this context, we discussed the various routes available to us for investing in stocks – their pros and cons.

If you have any questions or comments drop a line in the comments section below.

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