Today we are going to discuss one of the most basic topics for a beginner- How to invest in the share market?
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 the share market:
- Savings account
- Trading and Demat account
- Internet connection
For opening a Demat account, the following documents are required:
- PAN Card
- Aadhar card (for address proof)
- Canceled cheque/Bank Statement/Passbook
- Passport size photos
- You can have your savings account in any private/public Indian bank
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).
3 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.
Pay down your ‘High-Interest’ debts first
If you have any kind of high-interest paying debts like personal loans, credit card dues debts, etc, then pay them first. The interests of these loans can be even as high as your returns from the market. There is no point in wasting your energy to give all the returns you made from the market as interests of your debts. Pay down these debts before entering the market.
Invest only your additional/ surplus fund
- Stop right there if you are planning to invest your next semester tuition fee, next month flat rent, savings for your daughter’s marriage 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 servers 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 prerequisites and the basics so now we talk about How to invest in the share market?
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 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 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.
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.
Read some investing books and Articles
There are a number of decent books(articles) 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:
- The Intelligent Investor by Benjamin Graham
- One up on wall street by Peter Lynch
- Common stocks and uncommon profits by Philip Fisher
- The Dhandho Investor by Mohnish Pabrai
- The little book that beats the Market by Joel Greenblatt
Besides, there are a couple of more books that you can read to build good basics of the stock market.
Choose your stockbroker
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
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.
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.
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.
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 and
- 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.
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