How to invest money in Share Market in India? : Here is the answer. Before going into depth regarding why millennials are so skeptical of the share markets, we need to first understand what we mean by ‘Equity Shares’, which constitute an indispensable part of share markets. So basically, the entire capital of a company is divided into small units, which are known as ‘Shares’. Funds raised by a company via the issue of equity shares is known as ‘Equity Share Capital’. Equity shares represent owner’s funds (funds provided by the owners of a business entity).
Now let us come to the risk component of equity shares. Unlike borrowed funds (like bonds and debentures), equity shareholders do not get a fixed rate of return (which is known as dividend). What makes equity shareholders the primary risk bearers is the fact that they enjoy high returns in the years of prosperity. In other words, there is quite a lot of uncertainty attached to equity shares as they are subject to the risk of fluctuating returns. This is why, traditionally, gold has always been the most sought after investment arena for the risk averse Indian investors. And why not? After all, we can’t ignore the fact that this precious yellow metal is deemed to provide you an hedge against inflation.
“Unless you can watch your stock holding decline by 50% without becoming panic stricken, you should not be in the stock market.”- Warren Buffett
Benefits for Equity Share Holders and Issuer
Quite interestingly, there are various benefits which are enjoyed by both the issuer as well as the equity shareholders. These are discussed below:
- Equity share capital is to be paid only at the time of liquidation of a company. So, it is a permanent capital for the business entity.
- In order to raise funds via the issue of equity shares, a company does not need to mortgage its assets.
- Payment of equity dividend is not compulsory for the company during years of losses (which is a demerit for equity shareholders).
- Equity shareholders are entitled to voting rights and have a say in the management as well.
So, if you are eagerly looking forward to investing in share market, this article will surely help you out and provide you with a deeper insight into all the requirements that need to be met before investing in the Indian share market.
10 steps to invest money in Share Market in India (For Beginners)
Let’s begin the journey. Here are 10 steps to invest money in Share Market in India that you need to follow:
1. Get your PAN card
PAN (Permanent Account Number, which is a unique 10 digit Alpha-Numeric number assigned to an individual by the Income tax authorities in order to assess their tax liabilities) is the most vital requirement for carrying out any financial transaction in India (like opening a bank account, filing Income tax returns, making investments in stock markets etc.). So make sure this is the first task you do before making investment in shares.
You can easily apply for your PAN card by visiting the NSDL/UTIITSL website and getting yourself registered by paying a nominal fee. Next step is to fill up the required form and provide copies of Identity proof, Address proof, Date of birth proof (your Aadhar card can serve all the 3 purposes) and 2 recent photographs. Then you need to dispatch these documents to the Income tax PAN services office. An e-card will be sent to your registered e-mail Id and the physical card will then be delivered to your residential address.
2. Choosing a Stock broker
Before moving ahead with choosing a stock broker (who will be authorized to buy/sell shares on your behalf), first of all, you need to decide whether you will be a trader or long term investor.
Now essentially, there are 2 types of stock brokers:
(a) Full service stock brokers
Apart from just helping their clients in buying/selling stocks, they even provide the services of a financial planner and do in-depth research and analysis regarding stock trading and investing. However, if you want to avail their services, then you will have to pay a relatively higher brokerage fee.
(b) Discount stock brokers
They don’t charge annual maintenance charges from their clients and prefer communications in online methods. Hence, they target tech savvy clients.
So, Before selecting a particular broker, you need to take various aspects like brokerage charges, customer service, geographical coverage, trading platform, background and trust factors into full consideration.
3. Opening a Demat account
After having finalized a stock broker, next step involves applying for a Demat account. With the advent of technology and widespread digitization, all trading in securities is now mostly done through computer terminals. So all the problems associated with holding share certificates in physical form (like theft, forged/fake transfers, transfer delays and hardcore paperwork) have been done away with. This process of holding certificates in an electronic form is called ‘Dematerialisation’.
Holding shares in a demat account is just like bank account and it’s very convenient as well. Moreover demat securities can even be hypothecated to get loans, which turns out to be very beneficial.
Documents required to open a demat account
PAN card, Address proof, 1 recent photograph, Bank statement, power of attorney etc. are the essential documents that are required to open a demat account with any SEBI (Securities and Exchange Board of India) registered broker. Established by the Government of India on April 12, 1988, the sole objective of SEBI is to promote an investor friendly and and healthy securities market growth.
For protection of investors
It also provides protection to investors from trading malpractices like price rigging (deliberate inflation/deflation of market price of securities) and insider trading (when directors/promoters of a company make use of inside information to make personal profits). It normally takes 1-2 business days to open a demat account. After that you are required to transfer money to your trading account for carrying out the necessary transactions in the share market.
4. Knowing about Depositories
A depository is an institution/organization that is responsible for holding securities in electronic form. In India, we have 2 national level depositories (that operate through intermediaries which are electronically connected to depositories and serve as contact points with investors. These intermediaries are known as depository participants): National Securities Depositories Limited and Central Depository Services Limited.
5. Time to gather some market info
There are certain books like Guide to Indian Stock Market, How to make Money in Stocks by William O’ Neil and The Winning Habits of Warren Buffett and George Soros by Mark Tier that will come in handy. Do give them a read.
Apart from these, you can also gather vital knowledge from trading journals and newspapers like: Business Standard, Economic Times. You can even go in for video tutorials on YouTube, attend seminars etc.
6. Tracking the Market
Once you are able to build a strong foundation for yourself and have a proper understanding of basic concepts, it is advisable to follow the market daily. Since you already have gathered basic information, it will be easier for you to now absorb the market dynamics.
This will even make you aware about the hows and whys of market movements.
7. Placing the order
Since by now, you must have gained enough knowledge, it’s time to put your knowledge to some practical use. You now have to create your own first strategy and accordingly place an order with your broker to buy/sell shares. An investor need to provide clear instructions to your broker regarding the number of shares and the price at which shares must be bought/sold. You will then receive an ‘Order Confirmation Slip’ from the broker.
In India, buying and selling of shares and commodities take place in 2 exchanges namely: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
8. UIN for big investments
In case you trade for Rs. 1,00,000 or more at a single point of time, then you need a UIN (Unique Identification Number).
9. Don’t Stop Learning
Make sure you are aware of any latest happenings/news related to the shares you invested in. Everything you go through will be a learning process for you. The key is to keep calm and observe the markets. Don’t be panicky. Try to be patient and eventually everything will turn out right.
10. Avoid some common Share market investment blunders
- Never put all your eggs in one basket. This is considered to be the golden rule of investment. So it is always advisable to spread your risks and practice diversification of portfolio. This enables you to cover your losses with the profits made on other shares.
- Don’t follow others blindly. Avoid being carried away with tips and unsolicited pieces of advice from others. Markets do not follow any trend and you can’t really predict when they will rise or fall.
- For a fresher, it is advisable to begin safe by investing in a company that has performed consistently well over a long period of time.
- Never ever borrow money for investment purposes. This will save you from falling into a debt trap.
- Do not judge a share by its price.
I would like to end by quoting Benjamin Graham, from his book, The Intelligent Investor.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
I hope my readers find this article useful. Happy Investing!!!
Author: Manasvi Nagpal
Read My Other Article: How to save income tax on salary in India?