How To Invest In The Share Market?

Stock market investment is for long-term players. One of the easiest ways novice investors can start is by opening an online trading account for invest in stock market or stock mutual funds.

 

Periodic investments lead to the habit of financial discipline, motivating you to save and invest wisely. Though first-timers might be slightly unnerved after hearing instances of their risky nature, all you need is a thorough understanding before you get started. 

 

Here’s a brief guide that will take you through the process of stock market investment.

 

What is a stock market?

 

The stock market is a platform wherein shares of publicly-listed companies are bought and sold frequently. In India, the Securities and Exchange Board of India (SEBI) lays down a specific set of rules for formal exchanges and over-the-counter markets (OTC) to conduct financial tasks.

 

You are essentially buying percentages of ownership in a company when you invest in share trading. The purpose of shareholding is to wait for a suitable time when the company performs well. Once that transpires, your shares will become more lucrative, and other investors will be ready to purchase them for a higher price than when you initially paid. At this point, if you sell those shares, you will reap massive gains.

 

Types of investments in Stock Market

 

IPOs are a popular investment option in stock market trading. When a company first launches in the share trade market, it offers a certain price for its shares which is valid for a limited time. After selling its shares in the primary market, the firm gets listed and will begin selling its shares in the secondary market. Its prices will then start varying according to market forces. For instance, Nykaa’s IPO shares were worth INR 2001 from October 28-November 1st. Whoever sold those shares within the three days made maximum profits.

 

Other than stocks, here are other kinds of investments in the share market: 

 

  • Bonds

 

A bond is like a loan that an investor lends to a corporation, government, or any other institution in return for interest payments over a fixed period and the principal amount upon maturity. Various types of bonds are available like treasuries, agency bonds, corporate bonds, and municipal bonds.

 

  • Mutual Funds

 

With just INR 500-1000 each month, you can begin investing in mutual funds. Mutual funds permit you to possess a basket of expensive equities at a lesser price. While the gains may be watered down, unlike direct stock investments, if you believe in and wish to invest in megabrands, mutual funds will precisely fulfill this even if you invest a little bit. Furthermore, most mutual fund schemes have systematic investment plans, or SIPs, suitable for investing a predetermined amount every month. You can invest in debt securities in addition to stocks. 

 

  • Derivatives

A derivative is an agreement approved by two or more parties whose value is determined by an underlying financial asset, index, or security. Derivatives could either minimize risk (hedging) or bear that risk in exchange for future gains (speculation). Futures contracts, forward contracts, options, swaps, and warrants are all examples of regularly used derivatives.

 

  • Future and Options

 

An agreement to buy or sell a stock on a specific date at a specified price is called Future and Options. Whereas, in an Options contract, the investor has the right but is not compelled to buy or sell securities at a predetermined price on a specified date, even if they might have previously agreed.

 

 For example, if you hold a put option to sell shares of Company ABC for Rs 50 at a later date and share prices climb to Rs 60 before the expiry date, you can choose not to sell the share at Rs 50.

 

Key Benefits of Invest In Stock market

 

First-time investors start by investing in the share market before branching out to other options. Their stint with stocks gives them considerable investment experience and confidence. Here are other reasons why working adults consider investment in the stock market: 

 

  •  You can expect higher gains

Stock market trading allows for earning more significant returns than a fixed deposit scheme. If you acquire shares in a reliable firm and retain them for an extended time, you may amass a sizable fortune. Thus, investing here allows you to compound your money over time and generate wealth for various life goals.

 

  • You will be able to manage expenses during inflation.

A plain consumerist attitude is quite defeatist in a world with constant price spikes. Inflation is the overall rise in an economy’s price levels over time. It reduces the value of your investments and the purchasing power of your money. A food item that costs Rs. 100 now may cost Rs. 120 in a year. Bank FDs and PPF returns are less likely to withstand the impact of inflation. If you stay invested in the share trade market for a long time, the returns are substantially more significant and can help you beat inflation. Many share market investors have successfully accumulated enough wealth to buy a house.

 

  • There are many investment options in the share market.

Diversification is a basic tenet of investment. You can invest in stock markets various assets including debt securities, common stock, preference shares, large-cap stocks, mid-cap stocks, and small-cap stocks. This, in turn, diversifies your risk. If the value of one falls, the other can compensate. However, take care not to over diversify, as this will add no value to your investment.

 

  • Simple to understand 

The share market is not a tough nut to crack. All you need is a disciplined commitment to long-term investment and a little research on the firms you wish to invest in stock market. You may do it yourself or hire a broker to assist you. You only need a trading account and a Demat account. Similarly, because there is no lock-in period for share market investments, you may purchase and sell shares anytime. With as little as Rs. 500, you can start share market investments.

 

Difference between Primary and Secondary Share Market

 

If you intend to invest in shares, you should know that there are two stock exchanges: primary and secondary stock markets.

 

  • Investing in the Primary Share Market

 

An Initial Public Offering (IPO) is the method of investing in the primary share market (IPO). After a firm gets the investor applications for an IPO, the applications are tabulated, and shares are allocated based on demand and availability. To invest in both the primary and secondary markets, you must first open a Demat account, which retains electronic copies of your shares. A trading account, which will facilitate the purchase and sale of shares online, is also necessary.

 

What is Application Supported by Blocked Account?

 

In some rare contexts, a trader can directly apply from their bank account. An IPO application via net banking is made simple by a procedure called Application Supported by Blocked Amount (ASBA).

 

According to the ASBA process, if a person applies for shares worth 1 lakh, the proceeds will be stopped in their bank account rather than delivered to the firm. The precise amount will be deducted when you get your share allotment, and the balance will be released. This procedure must be followed by all applications submitted to IPOs. Once shares are assigned to traders, they are registered on the stock exchange and can start trading within a week.

 

  • Investing in the Secondary Share Market

 

The stocks’ recurrent buying and selling activities make the secondary share trade market. To know how to buy stocks in the secondary share market, follow these mandatory, albeit simple, steps.

 

Step 1: Open a Demat and trading account.

For a smooth transaction, both the Demat and trading accounts must be connected to an existing bank account. So all you need to do is contact any bank and let the representative know that you wish to open a trading and Demat account with them.

 

Step 2: Selection of shares. 

Log in to your trading account and select the stocks you want to sell or acquire. Ascertain if you have the necessary cash to acquire those shares.

 

Step 3: Select the price point.

Decide if you wish to purchase or sell a share. Wait for the buyer or seller to accept your request.

 

Step 4:Complete the transaction

Once the transaction is completed, you will get either shares or money in exchange for the stocks you have acquired or sold.

Make a note of how long you want to stay involved and what financial goals you hope to attain with these investments.

 

What’s the procedure to open a Demat account?

 

Most banks take this entire process online. They will ask you to mention the depository participant, after which you will be given a Demat account opening form to complete. Before hitting the submit button, the necessary KYC documents must be uploaded. Then you will have to sign the contract along with your depository participant. The concerned authorities will verify the details before providing you with a Beneficial Account Number.

 

  • Choose an intermediate bank.

It would help if you chose an approved bank, financial institution, or broker with which to create an account.

 

  • Documentation

Photocopies of KYC must be submitted, such as PAN, AADHAR, photographs, and other essential papers.

 

  • Confirmation

The Demat account is opened upon satisfactory verification of the papers presented. The intermediary you chose provides you with a unique Client ID. It will allow you to gain online access to your Demat Account.

 

Required Documents for opening a Demat/Trading Account

To start trading in the share market, you’ll need the below-mentioned documents:

 

  • PAN Card
  • Aadhaar Card
  • Name on the canceled cheque from the active bank account showing IFSC Code, account number, account holder’s name, and signature.
  • Documents assuring that the applicant earns a stable income.
  • An address proof based on a list of documents that have been accepted in writing by your broker, depository participant, or bank.
  • Passport-sized photographs of the applicant.

 

What should you research before investing in the stock market?

 

  •  Understand your risk appetite

The amount of risk that you can tolerate is referred to as your risk appetite. Several factors influence risk appetite, including investing timeframe, age, finance goal to be achieved, and income. Another essential factor to consider before trading in the Indian stock market is your present liabilities. For example, if you are the only breadwinner in your family, you should be less likely to take chances. Or you can have large-cap stocks in your portfolio.

Your investment profile can disclose which products are most suited to your risk tolerance. It helps you verify that you are taking the appropriate level of risk for your lifestyle.

 

  • Create an investment plan

Establish an investment strategy that specifies the amount of capital you want to generate from your assets and the time you have to remain invested to achieve that amount.

 

  • Regularly invest

If you have a Demat account, you must set aside money for regular investments. Create a personal budget, keep track of your costs, and see how much you can save. A Systematic Investment Plan is the most excellent approach to investing in the market (SIP). A SIP is a monthly investment of the same amount in a mutual fund. It allows you to estimate the various market levels you can enter, maintain solid investing habits, and gradually raise your investments as your confidence grows.

 

  • Create a diversified portfolio

The fundamental criterion for constructing any portfolio is to invest in a diversified variety of assets. It is because it lessens the effect if a specific asset performs poorly. Diversification spans asset classes, industries, and business cycles. It may be enticing to put all of your money into a rising sector. However, it is usually preferable to diversify across industries, balancing market size exposure and offsetting the risk incidences of equity shares with stable but lower-yielding bonds. Finally, employ SIPs to ensure that you have infused money inequities throughout the market cycle.

 

  • Rebalance your investment portfolio

Your portfolio must adapt as your priorities shift over time. You should rebalance your portfolio every quarter to ensure that you are not over or underexposed to one company or asset class. This is particularly important when you get older, as that’s when the responsibilities increase. 

 

For example, you may desire to reduce your risks when starting a family or approaching retirement age.

 

How Much Does it Cost to Invest in the Share Market?

 

There are a few types of charges that you will usually pay:

 

  • Transaction costs

All brokers are paid a brokerage charge for facilitating trade on your behalf. They assume the responsibility of collecting taxes and dues given to the government, such as the Securities Transaction Tax (STT), SEBI charges, and Goods and Services Tax (GST). These expenses are rapidly decreasing due to the introduction of discount brokers.

 

  • Demat fees

 While your broker or brokerage platform will open your Demat account, they will not administer it. You must pay a small annual fee (usually collected by your broker or the brokerage platform). These fees might range from INR 100 to INR 750. To protect your interests, Demat accounts are maintained by central securities depositories such as NSDL or CDSL, which the government regulates.

 

  • Taxes

You pay a percentage of your investment profits to the government as taxes. These tax rates vary depending on the government’s cess or surcharge. If you hold the stocks for more than a year, you must pay a long-term capital gains tax of 10% (), and if you hold for less than a year, you must pay a short-term capital gains tax of 15%. For long term capital  gains over and above INR 1 lakh, there’s a tax exemption of upto  INR 1 lakh on equity. This exemption will be implemented upon linking the PAN card with the trading/demat  account.

 

Risk Management Techniques for Active Traders

 

Trading may be fascinating and even successful if you stay focused, do your research, and keep your emotions in check. The greatest traders must employ risk management strategies to keep losses under control. Staying in the game requires a planned and objective approach to trimming losses using stop orders, profit-taking, and defensive puts.

Risk management aids in lowering losses. It can also prevent traders from losing funds. When traders lose money, they are vulnerable to risk. If the risk can be minimized, traders can increase their chances of making money in the market.

 Most traders use an online trading app to check the performance of stocks on a minute-by-minute basis. 

 After all, a trader who has made many gains might lose it all if 1 or 2 deals go wrong. So, how do you create the most effective approaches for mitigating market risks?

 

Let’s go through some straightforward tactics for protecting your trading profits.

 

  1. Make a Trade Plan

 

“Every battle is won before it is fought, Chinese military leader Sun Tzu famously observed. This expression says that wars are won by preparation and strategy rather than combat. Similarly, skilled traders believe in “Plan the deal and trade the plan.” Just as in combat, planning ahead of time may mitigate losses.

First, ensure that your broker has experience in handling frequent trading. Some brokers cater to customers who trade infrequently. They demand excessive charges and do not provide the necessary analytical tools for aggressive traders.

Stop-loss (S/L) and take-profit (T/P) levels are two strategies for traders to prepare ahead of time while trading. Successful traders understand how they are willing to spend and how much they are willing to sell. The resultant returns are then compared to the likelihood of the stock meeting its objectives. They execute the deal if the adjusted return is high enough.

In contrast, unsuccessful traders frequently enter a trade with no idea of the points at which they will sell for a profit or a loss. They also fail to analyze the quantitative parameters by trading apps or stock market apps.  Emotions take over and determine their deals, much as they do for gamblers on a winning (or bad) run. Losses frequently cause people to cling on to recoup their losses, while winnings might motivate traders to continue.

 

  • Consider the one percent rule

 

Many day traders follow the 1% rule. The rule of thumb states that one should never invest more than 1% of your cash in your trading account on a single deal. If you have Rs 10,000 in your account, your stake in any specific instrument should not exceed Rs 100.

The most straightforward approach to limit your losses is to keep the rule around 2% – any more, and you’ll be risking a significant portion of your trading money. This method is popular among traders with balances of less than 

Rs 100,000; some even go as high as 2% if they can afford it. Many traders with more significant account balances may choose for a lesser proportion. It is because when your account size grows, so does the position.

 

  1. How to More Effectively Set Stop-Loss Points?

 

Here’s what you need to keep in mind when establishing these points:

 

  • For more volatile equities, use longer-term moving averages to limit the chances of price fluctuation that would trigger a stop-loss order.

 

  • Adjust the moving averages to correspond to the intended price ranges. More extended targets, for example, should employ higher moving averages to limit the number of alerts created.

 

  • Stop losses should not be lower than 1.5 times the current high-to-low range (volatility) since they are far too likely to be implemented arbitrarily.

 

  • Adjust the stop loss based on the volatility of the market. If the stock price isn’t fluctuating too much, the stop-loss levels can be tightened.

 

  • As volatility and uncertainty mount, use recognised actual events, like earnings announcements, as significant periods to enter or exit a trade.

 

 

  1. Downside Put Options

If you are approved for options trading, purchasing a downside put option (protective put) can be used as a hedge to curb losses from a failing trade. A put option gives you the right, but not the responsibility, to sell the underlying stock at a specific price on or before the option expires. So, if you hold XYZ stock at Rs 1000 and purchase the 6-month Rs 800 put option for Rs 10.00 in premium, you will be effectively shut out of any price decline below Rs 790.

 

  1. Calculating Expected Return

 

Placing down the stop-loss and take-profit levels are required to compute the projected return. The significance of this calculation cannot be emphasized since it requires traders to think through and analyze their deals. It also provides a systematic way of comparing multiple transactions and selecting only the most successful ones.

 

Certain vital factors should be considered when investing in the stock market. These include structuring your investments, evaluating your risk tolerance, and ensuring that your portfolio is diverse. If you’re having trouble choosing fair shares, planning your investments, and setting objectives based on your acceptable level of risk, reach out to our experienced traders at Kuvera and take advantage of our stock guidance services right away!

 

Frequently Asked Questions

 

  1. Can I invest 1000 RS in the share market?

The best part about invest in share market is that you don’t have to wait till you have a significant corpus to begin investing. While this may be true for large-ticket investments like purchasing a home, most retail investing alternatives are started with as little as Rs 500 or Rs 1000 each month.

 

  • What’s the success ratio of stock market trading?

In the equity market, investors may expect to earn 12% to 15 % every year on average. Those with a highly risky tolerance and a desire to achieve returns of 22 percent to 30% per year may opt to invest in equities that are high risk but have a longer investment horizon.

  •  Are NRIs eligible to invest in stocks?

NRIs can actively engage in the Indian stock market through the RBI’s Portfolio Investment Scheme (PINS). To invest in the Indian stock market, NRIs must have an NRE/NRO bank account, a Demat account, and a trading account.

 

  • Can I start share trading without a Demat account?

Without a Demat Account, it’s impossible to trade stocks or other assets. To trade in securities, you must have a Demat Account, as per rules of SEBI. While you can purchase IPO shares without a Demat Account, you cannot sell them.

 

  • What’s the minimum age to invest in the share market?

Contrary to popular belief, you do not have to be 18 years or above to create a Demat account for the first time. There is no minimum or maximum age to invest in the Indian stock market. You can open a Demat account as an adult or as a minor to trade in the stock market.

 

If you are under the age of 18, your Demat account may be managed in your name by your parents or an authorized guardian upon submission of all required documentation. When you reach the age of 18, the Depository participant will send you an invitation to complete the documentation necessary to transfer your information and give you the rights to operate the account on your own.

 

Interested in how we think about the markets?

Read more: Zen And The Art Of Investing

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