How to Invest in Stocks
How to invest in the stock market in India?
Why do people invest in the stock market?
The reason people invest in the stock market is that a lot of times, equity investments have proven to be a viable option for higher returns on investment in the long run. Furthermore, investing in stocks also gives you exposure to the Indian economy as a whole, you can learn how to invest in share market; be it any company, ranging from big-ticket items such as banks and publicly listed limited companies to niche markets.
One must always keep in mind that past performance of a stock or a stock market index is not indicative of future results, and you must always treat equity investments as a part of a larger financial plan.
How to invest in stocks in India: A step-by-step guide
Keep your PAN card handy
Firstly, you will need a Permanent Account Number (PAN). This is a mandatory requirement to demat any securities, including shares. The information on your PAN card should match details on your other personal documents. You can get one from the income tax department if you do not have one.
Opening a Demat and trading account
Steps to open demat account for stock investment includes opening a Demat and trading account, which will be your gateway to the stock market. It’s just like a bank account, stores your shares in an electronic format. And a trading account, in turn, allows you to buy/sell shares on the exchange. So, to open a Demat account, choose a Demat account provider. You can either go for a full-service broker or one of the many discount brokers doing business these days. A lot of discount brokers offer mobile apps for easier tracking of your investments.
Complete a KYC procedure. Almost all brokers do this online nowadays, so all you have to do is submit scans/copies of your PAN, Aadhaar, cancelled cheque, and a photograph and digital signature. After you submit the required documents, you will be sent a confirmation, and your Demat account will be activated within a day or two. Set up a bank account as a funding source for your trading account. Almost all trading accounts can be funded via UPI or net-banking these days. Almost all depositories in India are either NSDL or CDSL, so you might want to ask your broker whether your shares will be held with one of them.
Funding your account
Now, it’s time to start investing. You can do so via net-banking or UPI, as discussed above. Make sure you make an informed decision. This point, unfortunately, is one a lot of novice investors skip. Before buying a stock, you need to make sure you have done sufficient research on the company. Know what business it is in, how it makes money, and how successful it has been in the past. Study its financials, such as revenue, profit margins, and debts, and read up on any news pertaining to it.
Researching stock market indices, such as the S&P Sensex or Nifty 50 broaden your knowledge. They represent the market as a whole and give you a rough idea on it’s performance. Post that, you can move on to researching individual stocks.
Placing your orders
Decide what stock you want to buy, and in what quantity. You can also decide whether you want to place a market or a limit order. Market orders execute instantly at the current price, while limit orders let you choose the price at which you want to buy the shares. After placement, the shares will be directly credited to your Demat account.
How to invest in stocks with little money
It is completely normal not to have a lot of money when you are just getting started, so here are some methods for funding your stock market investment:
- Buy less. There is no specific way forward; just decide how much you are comfortable with. You can even buy one share, if you want!
- Buy in SIP. You can set up a systematic investment plan, which lets you buy a certain amount of stock every month, at a specific price.
- A lot of brokers offer this option these days, so it is worth considering index funds. Index funds are similar to mutual funds in concept but track a certain stock market index, like the Nifty 50. You can invest in them without risking too much money at once.
- Buy blue-chip stocks. These are stocks of big, well-established companies that usually offer better stability and security.
Everything else you need to know about stock investing
The most important thing to know about stock investments is that they are market-linked. They are directly dependent on the performance of individual companies and, by extension, the economy as a whole. There is no assurance of returns when it comes to stock market investments, and it is entirely possible to lose money if you are not careful.
That is why it is so important to start with quality stocks that have a longer lifespan and better projected performance. Furthermore, diversification is key to minimizing risk, as having all of your money invested in one company can be potentially damaging if that company were to underperform. Lastly, investing with a long-term view is generally advisable, as trying to time the market is a precarious endeavor.
Diversification and other assets
More seasoned investors generally advise against putting all of your money in one asset class. Apart from stocks, one can also consider putting their hard-earned money in fixed deposits, mutual funds, real estate, and gold, among others. Some people have even considered P2P lending as an alternative to diversifying their stock market investments. Platforms such as LenDenClub operate under the aegis of the RBI and let you lend money to borrowers directly, cutting out the middleman and earning profit from the interest in the process. It could very well be an option for you, but one has to be careful about the risks involved, such as a potential default from the borrowing party.
The bottom line is that you should never put all your money in one particular asset, as they all carry varying levels of risk. Your risk tolerance, as well as your financial goals and the period within which you want to achieve them, should dictate how much you allocate to each category.
Frequently asked questions
Final thoughts
Investing in the stock market is complex but has helped a lot of people grow their wealth exponentially. This article hopes to give you a general understanding of how one goes about investing in stocks. Remember, the most crucial steps are to set up the correct accounts, fund them, do your research, and buy your first share. In time, with the right know-how and experience, you will learn what works and what does not, and your financial growth will accelerate.
Team LenDenClub
LenDenClub is India’s largest peer to peer lending platform which started operations in India in 2015. We have been helping lenders diversify their portfolio beyond traditional investment instruments ever since.