Investing in the share market can be a little nerve-wracking for investors, especially if you are a complete beginner to it. Many investors dive into the share market in hopes of higher returns, but you must remember that the share market has its ups and downs and you need to plan your investments before expecting good returns.
Starting your investment plan in the share market is a little complex when you start looking into it but all you need is a little guidance on the topic. So here is everything that you need to know about the share market.
How to Invest in Share Market?
The first question that arises when you think about investing in the share market is what are the basic requirements and documents that you need.
1) PAN Card
One of the most important documents that you need for trading in the share market is the PAN card. Even if you are not an investor, having a PAN card can prove to be extremely beneficial as you can avail a number of tax exemptions through it.
Make sure that your PAN card is error-free because a card with any error will get your application rejected.
2) Get a Broker
You cannot trade in the share market directly. Trading in the share market is done by authorized agents called stockbrokers. So, you need to hire a stockbroker to help you buy and sell shares in the share market.
One added advantage of hiring a stockbroker is that they know the market; its trends and its working. They are experienced in studying the market and can help you maximize your returns by helping you make better choices.
Just be sure that the broker you hire has some experience trading in the share market.
Although, it is not impossible to trade without a stockbroker. We will discuss this further into the article.
3) Demat and Trading Account
The next step to start your journey in the share market is opening a demat and a trading account. Without having these two accounts it is not possible to buy and sell shares.
To begin with the basics, a demat account helps you hold all the financial securities or in this case shares without physically having them in your possession. With this being said, you will not be able to keep your shares without a demat account.
But a demat account only holds your securities, it wouldn’t allow you to sell them. So for trading in shares, you will need a trading account.
Most of the online and offline brokers offer a two-in-one account that works both as a demat and trading account. So while choosing a broker, you can look into the services and if they provide a multi-account.
Read – Best Demat Accounts in India
4) Link Your Bank Account
Even if you are a noob at trading in the share market, you still must know that you will have to link your bank account with your trading account for the transfer of funds; debit or credit.
Linking your bank account with your demat and trading account will ensure a smooth transfer of funds between the two interfaces. Debit will be made from your bank account and simultaneously the shares will be credited to your demat account.
Although there are some online brokers that allow you to buy securities through debit card, I suggest you link your bank account for smooth functioning.
5) Obtain a UIN
A UIN or a Unique Identification Number is specifically allotted to traders who are involved in a transaction of more than ₹1,00,000.
Now, there is a high chance that you will not make a single transaction of ₹1 lakh so you can skip this step in the beginning and see how it goes in the future.
6) Start Trading
With all the above steps done, you can now start buying and selling shares.
Although it does not sound like a very difficult task there are a number of things that you must keep in mind before buying any securities. However easy it is to earn money through the share market, it is also easy to lose it.
Types of Stockbrokers
For complete beginners and part-time traders who are still learning the basics of the stock market, it is best to hire a stockbroker to help them gain perspective on their securities and get help from a professional.
There are two types of stockbrokers that you can choose from; full-service brokers and online or discount brokers.
1) Full-Service Brokers
People who want to have experienced professionals handling their stocks can definitely opt to hire the traditional full-time stockbrokers. A full-service broker will go through the complete procedure and determine a trading plan for you. Some of the factors they will look into will be your marital status, income, lifestyle, risk tolerance and some of the other financial liabilities including debts.
Moreover, with a full-time professional broker, you can also plan your various investment plans including real estate planning as well as retirement planning. Your broker can help you wisely invest your assets and not necessarily in the share market.
If you are a complete beginner and have zero ideas about how the market actually works, I would highly recommend you to hire a full-service broker as he or she will study the market before putting your money in it.
And you can always change your broker if you are not satisfied with the results.
2) Online or Discount Brokers
Online brokers or as they are commonly called, discount brokers, do not offer much on the advice section. On one hand, we get limited professional help, on the other hand, we are getting less expensive brokerage plans.
With online brokers, you have to keep a prepaid account that you can use to make transactions. The funds are debited and credit through this account and the securities are kept in your demat account with the online broker.
If you do not have enough funds to hire a traditional stockbroker, then you can go for online brokers. With them, you will get hands-on experience of trading stocks and you can learn to read charts and plan your own trading strategy.
Direct Stock Purchase Plan
As mentioned earlier in the article, it is not impossible to trade without hiring a stockbroker. This is possible if you are directly buying the stocks from the companies itself. But you must remember not all companies offer a direct stock purchase program (DSPP).
Most of the blue-chip companies let small investors buy ownership directly from the company. This helps the investor gain very high returns. But it is worth mentioning that the risk is also high.
If you are considering the DSPP, then make sure that you have made a thorough research of the company and have studied their past performance before investing your money in them.
Types of Orders
Now that we have covered stockbrokers, it is important that we move on to the types of orders. Going around the market, there are a number of different types of orders that you can trade in but let us focus on the two main types of orders; market orders and Limit orders.
1) Market Orders
The most common type of order is a market order. In simple terms, these types of orders are brought by active traders who are continuously involved in buying and selling stocks. The price for the market orders keep changing and experienced traders can bid their way to the profit.
Usually, with market orders, the traders aim to gain small profits to earn big returns.
One important thing worth mentioning about the market orders is that market order may not be executed at the mentioned price. The stock market is a volatile and constantly changing place. The price at which you decide to buy or sell the order may change by the time the transaction is completed.
As mentioned already, traders who keep an eye on the market and are indulged in rapid stock exchange usually go for market orders. Even for beginners, market orders can be a good start, especially as small investments.
2) Limit Orders
Many traders have a certain goal when they trade in the share market. Here is where the limit orders come into play.
Limit orders are also commonly called a pending order. Through limit orders, the investor can set a specific price at which he or she wants to sell the order. In case the order doesn’t reach the pre-defined price, the order will not be executed.
There are four types of limit orders.
A) Buy Limit
As the name suggests with this limit you can set a specific price at which or below which you want the order to be executed. But it is important that you put this limit on the right side of the market.
Do not put a buy limit that is unachievable, making it impossible to execute the order. Unfortunately, it is a very common mistake made by new traders.
B) Sell Limit
Just as the buy limit puts a limit on the buying price, the sell limit puts the limit on the selling price of a stock. The traders can set a predefined price for selling the order to gain at least a specific amount of profit.
It can also be used to prevent loss.
C) Buy Stop
Opposite to the buy limit, the buy stop is used to buy a security at a price higher than the current market price. When the trader specifies the price of an order and puts the buy stop, the transaction will be executed as the order reaches the specified amount. After the amount is reached, the order will be converted to a market or a limit order.
D) Sell Stop
The other side of the sell limit, the sell stop is an order to sell a security at a lower price than the current market price. An order set with the sell stop limit will only become active once the specified amount is reached.
How to Earn Maximum Returns While Selling a Stock?
Earning profits from buying and selling of the stocks requires two important choices: what and when you buy the stock and when you sell it.
Usually, a stock should be kept untouched until it is one of the following three reasons.
- The bought stock was not the best choice.
- Or the price of the stock has risen dramatically.
- The stock has reached an unsustainable price.
Let us understand these three points with a little detail.
1) Not the Right Stock
Sometimes what seems like a good choice may not turn out like that after you have bought it. Many new traders lose confidence and endure great losses in such cases. But buying the wrong security is not the gravest mistake of all.
In such cases, it is important that you plan out your move strategically. It is usually best to let go of the stock even if it endures a little loss.
Make sure that you analyse the charts and research about the company before you buy a stock. Even if it doesn’t turn out the way you wanted it to, do not endure huge loss or turn them into a liability by not selling it on time. It is better to face a small loss rather than losing a good amount of money.
2) The Stock Rises Dramatically
Many times, it does not occur to new traders that the price of a newly bought stock may rise dramatically. And this is not a rare occurrence in the stock market. So while you invest in the stock market be prepared for unexpected turns.
When a cheap stock faces a dramatic rise, it is best to sell it and take your profit from it. It is common that the stocks that rise suddenly have a sudden fall too. It is always best to first earn your profits and if you see the price fall back then you can always buy it again.
The misconception of thinking that the more you wait the more you earn often leads the inexperienced traders down the pit of losses.
3) Getting the Best Value
Deciding to sell a stock is extremely difficult when it has remained stable for a while and keeps on fluctuating. Here there is always a dilemma of waiting to get to a higher bid but you do not have any certainty that it will rise.
For inexperienced traders, it is a little difficult to understand the market trends and how the stock will perform in the near future. So if you are not able to plan out the future potential of the stock, it is better to take what you are getting and move on.
This is the ‘margin of safety’ concept. If the company’s valuation gets higher than its fellow companies then you can consider selling the stock.
Another thing you can consider is the P/E ratio. You can sell the stocks of the company if its P/E ratio shows a significant increase in its average P/E ratio for the past five to ten years.
There are a number of other factors to consider if the stock gets to an unsustainable price like the reduced demand, there quarterly financial reports and the annual revenue.
4) Financial Needs
Now, this is not one of the conditions mentioned in the above points but an unexpected financial need is one of the most common reasons to withdraw stocks. Most people dive into trading because of this specific reason. Having stocks is an asset which if planned right, can come extremely handy.
What’s important is the fact that if you are jumping into the share market to make extra money while simultaneously buying stocks as an asset, then it is important that you do your research and buy the stocks that are suitable for long-term investments.
Types of Stocks
Different individuals have different expectations from their investment plan. The type of stocks you buy mostly depends on your investment planning. Here I have discussed three main types of stocks.
1) Growth Stocks
When we talk about growth stocks, we point to the stocks of those companies who are showing substantial potential growth in the coming future. Growth companies usually show a better growth rate than the other companies in the share market. Most of the common growth companies come from the area of technology, energy resources or biotechnology.
Growth stocks commonly come from newly established companies that offer unconventional products that are expected to bring a considerable change in the future. But remember, since these companies are new and their future is still unsure, the risk of investment is also high with them.
To invest in growth stocks, first and foremost look into their financial records and company reputation. What impact do they have on the market? And how does their business model fit into the current scenario?
Once you go through these basics, you will know which growth stocks you want to buy.
2) Value Stocks
Value stocks are a little tricky to understand but if done right they can prove to be the best choices one makes.
Value stocks are the stocks that seem to have a lower price than its book value. And this is what makes these stocks attractive for the traders who are looking for good returns. But you need to have a sharp eye to determine these stocks and predict their future value.
One of the common indicators of a value stock is its dividend payout ratio. A good dividend ratio will determine the dividend paid the shareholders and you can easily decide if the stock is worth buying.
There are several reasons for the fall of the price of the stock and it may not have anything to do with the companies performance. So, instead of judging the stock by its popularity go through thorough research of your own.
3) Income Stocks
As the name suggests, income stocks are used to give a boost to the fixed income of an individual rather than improving their investment portfolio. Income stocks are further subdivided into two different types of stocks: common stocks and hybrid securities.
Common stocks are normal market stocks that remain mostly stable and tend to pay a competitive dividend to the stockholders.
The other type of income stocks is hybrid securities. These securities are usually a preferred more than the common stocks as they not only offer competitive dividends but also comes with added advantages. They are more like bonds rather than stocks and comes with various features that make them more attractive than the common stocks.
In theory, income stocks feel like the best types of stocks one should invest in but in reality, they have the highest risks. So if you are someone who is not willing to take too many risks while trading then it is better to start with the growth stocks and see where it goes from there.
Three Steps to Ace Trading
As a beginner, it is very difficult to understand market trends and how to exactly maximise the profit on your stocks. To avoid falling into the amateur’s mistakes pit keep in mind these three rules before making any decision.
1) Buy the Right Stocks
Now, it is impossible to not make mistakes. No matter how professional one is there are times when the universe just doesn’t work for you. So, to reduce the risk of getting caught up in the web of bad buying choices start researching on the various stocks that may be right for you.
Although research is important and you shouldn’t buy a stock without knowing the companies financial reputation, it still doesn’t guarantee that you will earn a profit.
The stock market is a volatile place that keeps changing and all you can do is take cautious steps. There is hardly anything that guarantees an easy flow of money here.
2) Think and Act
Hasty decisions hardly do any good while trading in the share market. When you decide to sell a certain stock, make sure that it is a well-thought decision. Sometimes the decline in the price of a stock makes the trader immediately sell it so as to avoid loses and most of the times, these fluctuations are temporary.
Moreover, waiting too long for a stock to earn greater returns can make you lose a huge some. It is very important to have a fixed amount in the mind and not let greed overtake your senses.
3) Avoid Rigid Decisions
Sometimes the failure is due to the hard and maybe unachievable targets that the traders set for a stock. Having an idea of where the market moves are good but believing that it will only show those results is not a very good choice.
The share market goes up and down several times a day and there is no guaranteed method to be absolutely sure of the outcome. So believing that your strategy is flawless will land you nowhere. It is better to keep track of the market and make decisions as per the current market trend.
Start Trading Today
The share market offers loads of opportunities for young investors who are looking for expanding their financial portfolio. It offers volatility and opportunities to refine your income and investment plan.
The share market is a pandora’s box for many and if you are looking for an opportunity to diversify your financial knowledge then you can definitely go for it but always remember, it is not a straight forward give-and-take program. Without putting in efforts and researching you will not achieve the best of what it has to offer.