Hello Investors! In this article, we will be discussing the basics tips and steps for beginners who wish to invest in the share market but have no or less knowledge about it. In traditional times, people used to invest in gold, but now the trend has changed; people are looking for different sources to invest, and shares are one of them. In fact, numerous people generate low returns because of less knowledge or might also have lost some money in stocks. On the other hand, when you see many investors who beat Nifty by earning high returns which might vary from 30-60%. The question that comes to your mind is, how? The reason behind this is experience and knowledge.
A Beginner’s Guide to Start Investing in Share Market
Various people wish to invest but do not know how to invest in the share market. Whenever anyone looks to invest in shares in India, the first question that comes to mind is, “How should a beginner start to invest in India?” One of the biggest mistakes that beginners do is that they invest in stocks just after listening to some stock tips brokerage houses or experts on TV. Even people who have never invested in shares would be ready to give you strong opinions and tips on how to start investing in the share market? These people make you realize that investing in the stock market is complicated, but you should not agree to all of what they say because it’s their business. The first thing that you should know is how to choose which stocks to invest and how they would make money. You can easily create profit from the stock market from your own analysis. Don’t worry; there is an effortless and straightforward way of doing that we will discuss in this article later.
Types of Investing
There are two ways of making a profit through investment, and these methods are used by various leading investors globally for making more money. Let us understand about them in short:
- Trading: A lot of people think that both of them are the same, but they are very different. Trading always aims at making a considerable profit within a short period irrespective of rising or fall in the market. They work in a different pattern and know how to earn in both rising and falling markets. When the market is rising, they buy more shares and sell them at a higher price in a shorter time frame. On the other hand, when the market is falling, they make profits by selling at a higher price and buying the stocks when the price is low. Thus, it involved trading in a short span that can be one day or just a couple of days. It can be really risky at times because of the quick fluctuation of the stock prices, so you should indulge in trading only when you have the experience; being a beginner, you might end up with a massive loss.
- Value Investing: As per Warren Buffet, you should always invest in the long term else do not think of investing in stocks. You should invest in companies on which you can rely and hold your shares for years. The benefit of long term investing is that you get the advantage of dividends, rise in stock price because of the increasing profit of the company over the years, and stock splits. Another advantage is that you ride out of the fluctuations that happen in the stocks with the belief that eventually, it would recover. Thus, if you hold stocks for a longer time, its outcome is exponential growth with immense wealth. Now, you have to decide which way you want to go as trading can help you make profits, but value investing would help create wealth.
Some advice before you start investing
Being a beginner, you need to remember these three things before you even think of investing in the share market:
Keep some cash in hand- It is paramount to keep some money in hand as you might need it in case you plan to switch job, change house or any such situation. If you invest all of the capital, you might end up losing financial freedom, which means you have to sacrifice on your personal freedom. So do not get tied up by investing all the extra cash, keep some of it for emergencies.
Step by Step Guide for beginners to start investing in Share Market
Here are a few steps for beginners to start investing in the share market so that they can be vigilant and avoid making the mistakes that can lead to less or no profit at all. These steps would not only make you confident but also benefit you in finding the right stocks, lessening risk, and earning more.
Step 1- Define your investment goals
The paramount steps that you should take are defining the investment goals and think about the end goals in mind. Ask yourself a few questions such as you want to invest in one company or multiple? You want to invest in high risk and more profit or low risk and low-profit shares? You want to invest just for fun and creating some wealth along with that? Make sure that you never over-invest in the stocks initially. Unlike some people, do not start investing and then think of your end goals. When you begin investing, you should know that the time frame is different for different investment goals, such as if you wish to save for your retirement, then you can choose a bigger time frame, but if you want to buy a new car then the time frame should be shorter. The reason behind defining your goals is that it tells you how much money you have, what return you want, and how much time you want to invest for.
Step 2- Create a plan
Once you are well aware of your financial goals after that, you can create a plan of investing it accordingly. You can easily find out that you wish to invest in a lump sum or through a systematic investment plan approach. You have to think carefully about how much money you can invest in a month so that your budget does not hit. The first thing that you should remove from your mind is that you need a lot of money to invest, no that is not true. You can even start investment from Rs.3, 000 months also. It helps in building an investment habit that can grow with time.
Step 3 – Choose your stock broker
This is a significant step that you need to take, as this can affect your returns immensely. In India, there are two types of stockbrokers which are: a. Full-Service brokers- They are also known as the traditional brokers who help you in trading, research, and advisory facility for commodities, stocks, and currency. They charge a commission on every trade that the client executes. Full-service brokers promote doing investing more in Bonds, mutual funds, Forex, IPO’s, and Insurance. Some of the traditional brokers are Sharekhan, Kotak Security, ICICIDirect, Angel Broking, and many more. b. Discount Brokers- They are also called budget brokers or online stock brokers. They only offer trading facilities to their clients. They allow the customers to trade on their own with very little interaction with a live broker. They do not provide any advisory and are excellent for people who believe in self-learning. Their brokerage is less, excellent speed, and a perfect platform for trading commodities, stocks, and currency. They usually provide you free research and educational tools so that you can make informed investment decisions. As they provide fewer services, they charge less as compared to the full-service brokers. Some of the discount brokers are Zerodha, Samco, Fyers, 5Paisa, and many more. Also Read: 12 Best Stock Market Trading Apps In India
Step 4 – Screening and filtering the right stocks
In this guide to start investing in Share Market, one of the most important things is to filter the right stock. You must be aware that there are thousands of stocks that are listed on BSE and NSE; hence it is quite a tough job to analyze each one of them by going their financial history and company’s reputation. Now how to select the best one? You can start by filtering the stocks whose fundamentals look strong. Here is the screening criterion for you:
Its market capital should be more than 500 crores Price to earnings should be less than 25 as compared to other competitive companies within the same field Check if its sale and profit growth is equal to or more than 10% Debt Equity Ratio should be less than 1 Always check if its EPS rate has been increasing since the past 5 years or not Its return on equity should be more than 20% The current ratio should be more than 1 Price to book value should be equal to or less than 1.5 as compared to the other companies in the same industry
Do not think that you would have to individually search for every information you can take the help of various online screen tools that would readily provide you with this information.
Step 5- Choose the companies that you understand
You must have filtered some of the companies by looking at their financial data and record. Now you need to read about these companies so that you can get the exact figure of the reputation of the company. You can visit their website, search on Google, or ask your friends who invest regularly. Knowing more about them would help you in understanding more about the product/ services and how its business works. For beginners, it is always good to invest in companies that they understand. For example, if you are into insurance, you can try to invest in insurance companies as it gives you a better insight. Also, you can choose the companies as per demand; for example, if real estate grows, you can invest in Jaguar as sanitary requirements increase or Cera (tiles). Ensure that the business model of the company should be easy to understand and also excite you.
Step 6- Select a platform to track your performance
This is again very important while researching as by tracking your progress, you can easily follow the stocks. You can use any spreadsheet or excel sheet to monitor your research. Make columns in it as per your understanding, such as stocks that you are interested in and wish to study more about stocks that you found good to invest in and one category for stocks that you want to track. You can make columns as per your research and understanding.
Step 7- Hunt for companies with a competitive advantage
Investing in companies whose financial figures are good is not enough; it is imperative for you to analyze the company from a competitive advantage too. In business terminology, competitive advantage is termed as Moat, which means that how you are better than the other organizations of your field. If the company has a larger competitive advantage, then the chances of its sustainability are more and hence the profits. If a company is better than its competitors, then it implies that it is tough to capture its share market, so this is a critical factor that you should never miss on. Competitive advantage can be of anything such as patents, intellectual copyrights, network effects, etc. For example, Sony has a strong brand name, reliable and huge demand in the market, and beats a lot of its competitors in various aspects. So if you want to start investing in the Share market then seek companies with strong moats being a beginner.
Step 8- Look for Low Debt Levels
If the company has a large scale debt level, it can pose a major risk to the company. Hence while you do the screening, always check this factor too, as mention above, the two factors that determine debt levels are Debt to Equity ratio and Current Ratio. This will tell you the true value of a company’s debt and how much it is dependent on borrowed capital for its growth. Also, it tells you clearly that if the company would be able to meet the short term obligations or not. The next thing you should analyze is that how is the organization handling the debts over a couple of years. As the company that persistently pays off the debt would increase its profit in the long run. Two Ways to check the financial health of the company-
Check the balance sheet: It includes the assets and liabilities, and it would comprise of current liabilities, which would tell you how much money the company needs to pay within 12 months. Try not to invest in an organization with a lot of long term debt as it is hard for them to use the money for any other purpose. Look at the long term debt ratio: You can calculate it by using a simple formula which is-
Long-Term Debt ratio= Long-term debt/total assets If the figure comes more than 1, then it implies that the company has more long-term debt than assets. A value of 0.5 indicates a low risk for the company.
Step 9- Use Return on Equity (ROE) and Return of Capital Employed (RoCE) for identifying the best stocks
There are a lot of big share investors who use these methods for calculating the company’s creditability and then decide if they should invest in its shares or not. ROE is a measure of financial performance that is calculated by dividing the net income of the company by shareholder’s equity. This is an excellent method as it lets the shareholder understand the profitability of the company and its efficiency. RoCE is used to measure how proficient is a company in generating profits from its capital. By using these two methods, you would be easily able to identify that in terms of investment, how profitable the company is, and how well it is utilizing its resources. If a company has a high ratio for both of these, then it indicates that the company has good growth potential in the future. If the rate is above 20% and has been rising since the last 5 years, it indicates that the company has premium valuations.
Step 10- Genuine, Transparent and Content Management
You should always check if the company is genuine and reliable because fraud management is one of the reasons people do not trust the stock market. As there have been numerous cases in the past where listed companies where declared fraud, did terrible deals, or misled shareholders, all this causes a massive hit to the savings of investors. Thus, always check the reviews and see if its policies are transparent, easy to understand, and reliable. Some of the significant things to check upon for checking if it is genuine or not are:
Thoroughly check the annual report– It is one of the first things that you should do as through the annual report you can get the complete understanding of the organization and its management. It also tells you about the company’s vision, strategy, and management analysis. You can quickly get the annual report on its website, or you can also mail the investment relations in charge of the company for emailing it to you. Look for its fraud and track record- You can search on any search engine for the same and see if there are any fraud report cases against the company executives. Do not forget to check on their track record and qualifications too. Check the percentage for promoters shareholding- This can be very beneficial for you as if you see that the promoters shareholding is high, that implies that they have trust in the company and sends a positive signal to the market.
Step 11- Best price to purchase the stock
Reaching this step means that you must have selected a few stocks where you are interested in investing. The next question that comes to mind is that what should be the best price for buying the shares? The answer is simple, search for the company whereby paying the minimum amount you can get maximum value. In this guide to start investing in Share Market, one of the most important things is to purchase the stock at the right time and right price. The right price means the intrinsic value of stocks, which is less than the actual cost of shares. Make sure that you do not buy the stocks at a high price, and in case if they do not arise in the future, then you can lose an enormous amount of money. If you purchase the stocks at a reasonable price, it does not only ensure safety but also safeguards the investment done from any downside risks. Thus, if you buy them at fewer prices, the chances of generating good revenue from it increase. You can also calculate it by using a formula: V= EPS*(8.5+1*G) In this, V is the intrinsic value of the stock EPS is earning per share for the last 12 months G is expected annual growth rate for the upcoming 5 to 10 years 8.5 is the assumed standard P/E ratio for any stock. If the stock is not available at the right price, then you should monitor the shares, and whenever the pieces are low, you can invest in them.
Step 12- Have an exit plan
If you want to become a good investor, then you should always have an exit plan. There are two methods to exit a stock, which everyone knows one is by booking profit or cutting a loss. There are different scenarios when you might want to sell your shares such as-
When you have urgent money requirement When stock fundamentals tweak If you find a better investment opportunity If you reach your investment goals
The best thing is if you reach your investment goals, as in this case, you can happily exit from the stock and even invest somewhere else. If the value of the shares has decreased immensely and is above your risk appetite, then it is also an excellent option to sell the stocks. Hence, whatever the situation is, you should always have an exit plan while you buy stocks. These were the 12 steps that you need to take before starting to invest in the stock market as it would not only help in minimizing risk but would also help you in making the decision wisely. Let us learn some more things that would help you as a beginner while investing in the share market.
Tips on Investing in share market
- Know what to expect from the market- You should never set unrealistic expectations and then feel disappointed if you do not get the desired results. If you think that in a short period your money would get double, then this is a wrong expectation. You only get 4% interest from your savings out, but yearly 15% is underperformance for many people. So set the expectations right so that you do not feel inadequate even after an excellent performance.
- Set Long-term Goals- The first thing you should think of before investing is that for how long you can spend, or would you need the cash in a couple of years. Once you know the purpose and the time after you would need, then you should try to invest somewhere else. The reason behind this is that there is no certainty that all your funds would be available when you require them.
- Start small– Being a beginner, you should not invest all your money in the stock market. Always start with a small amount, learn from it, and then plan to invest a more significant amount. You can also begin by investing Rs.3000 as initially; you need to learn and gain more experience in the stock market.
- Have control over your emotions- One of the major hindrances in the stock market is that people are not able to control their emotions, which leads them to make wrong decisions. When maximum people are concerned about the company, then it is most likely that the stock prices may fall, but if people are positive about it, then the chances of an increase in the cost of the stocks rise. People who are positive about the company’s performance are called bull, and the negative ones are called a bear. During the market hours, their battle continually changes the price of the securities. If the cost of the stock does not move as per our expectations, it creates tension, anxiety, and insecurities and questions like should I sell the stock to avoid further loss? Should I buy more shares as the price is increasing? When you buy stocks, you should be aware at what point you would liquidate them. Thus you should never take any decision out of emotions, think logically, and then take any action.
- Diversify your portfolio- This is a critical point to keep in mind that you should always diversify your investment for managing risk. Never invest all your money in just one stock try and invest in different stocks from various industries. For example, if you invest in JK cement and Ultra Tech cement, that is not considered to be a diversified investment. Invest in different sectors such as cement and tires, etc. as per your interest. The reason behind doing this is that if the cement industry is in recession, then all your investment would turn red.
- Invest persistently- You should make a habit of investing regularly and slowly raise the amount of investment. Try and invest your money in the long term for better results. Also, you should not invest a big time and wait for 10 years for the profit. Just try to invest in a small amount but do it regularly as that would not only give you experience, but you would have a better understanding of where to invest.
- Invest in Blue-chip stocks- As a beginner, you might not be aware of blue-chip stocks. They are the shares of the renowned companies whose stocks have been in the market for a very long period. For example, Reliance, ICICI Bank, Wipro, L & T, TCS, etc. all these are examples of Blue chip companies. These companies are reliable and well-known for their performance and are safe to invest in companies. It is also advised to beginners that they should begin investing in these companies initially, and once you have the experience, then you can invest in mid and small-cap companies.
- Avoid Leverage- Leverage means that you should not invest borrowed money in the share market. Banks or other financial institutions would give you 50% of the amount that you wish to invest in. For example, if you want to buy stocks 1000 of Rs.50 which comes up to 50, 000 so the bank would only lend you Rs.25, 000. Plus, you would have also had to pay the interest, if the stock moves up, then things sound good, but if the price of the commodities fall you would not only lose your money, you would have to pay the principal amount plus the interest to the bank from your pocket. So, avoid borrowing money for investing in the stock market. You can consider it as an option once you gain a lot of experience in the share market. These were some of the points every beginner should keep in mind while investing as they would help you in avoiding the common errors that most people do. Also Read: Top 10 Non-Banking Financial Companies (NBFCs)
How to Invest in Shares?
You require specific pre-requisites if you are looking forwards to invest in the share market in India. At the same time, we enumerate certain prevailing things that a person willing to invest in share market is supposed to be equipped with, such as internet connection, laptop/computer/mobile, and savings account. Apart from these common things, listed below is the procedure that you need to follow if you want to jump into this gigantic stream of business:
1) Pan Card
Permanent Account Number is the primary requirement for all the investors who want to enter and invest their money into the stock market. Not only for the investors of the stock market, but it is also essential for all the businessman or job-oriented employees who enter any kind of financial transaction. It is a unique ten-digit Alpha-Numeric number assigned to each individual that makes it accessible for the tax authorities to audit and manage all the taxable transactions. PAN is also mandatory for completing KYC (know your customer) procedure before you open any type of bank account, filing income tax returns, investing in shares, dividends, or mutual funds, and carrying out several other activities.
2) Hire a Broker
All the brokers are registered and certified by the Security and Exchanges Board of India (SEBI), who controls and operates the entire stock market. Brokers can either be individuals or companies or even online agencies. You might be wondering that you can save the money by not hiring a broker and do it yourself. However, you cannot directly buy or sell shares in this extensive market; only brokers will be able to do it as it is only them who are allowed and authorized to purchase or sell stocks on behalf of the investors. You can even pick up an individual broker whom you already know or who have some credibility in the market, or you may also approach numerous companies available in the market. You can also opt for the online option and chose the agency hassle-free that will facilitate the process of buying and selling stocks for you, such as IndiaBulls, ICICI direct, Zerodha, HDFC Securities, Angel Broking, and many others. The brokerage of every company may differ, which might depend on the types of services you opt for and the assistance they provide.
3) Trading and Demat Account
Opening a Demat and Trading account is a requisite. This account will enable all the transactions related to the buying and selling of the stocks. All the details will reflect in this account under your stock portfolio. As it is not possible to hold shares in physical form, it is hence indispensable to open a Demat and trading account for allowing the investors to do financial transactions and keep the shares in the Dematerialized state into this account. You can open this account in an individual or the company’s name. You can request for your account’s statement which will reflect the remaining shares you have, the shares you have sold, and all the vital information regarding your stocks.
4) UIN
UIN (Unique Identification Number) is only required if you are willing to invest a considerable amount of money into this market that is more than 1 lakh rupees at a single time. However, if you are a regular investor and do not want to play big, you would not require to opt for a UIN in that situation.
5) Depositary Participant
In India, there are two types of depositary participants naming NSDL (National Securities Depositary Limited) and CDSL (Central Depositary Services Limited). Both the depositaries comprise of the agents in the form of depositary participants who are responsible for providing you the account for keeping an account of the shares you possess. It is not similar to the Demat and Trading account, as under this Demat account displays the total number of shares you hold, and trading account manifests the number of transactions related to buying and selling of the shares. Whereas the role of depositary participants is to hold the shares that you have purchased and then release the stocks that you have sold.
6) Buying and Selling
The broker that you have hired needs to be informed about your specifications, what you are looking for. He needs to be given all the information regarding the number of shares that you wish to buy and the minimum price of the stocks below, which you are not likely to carry out the selling transaction for your shares. In case you do not have access to the internet and even if you have hired an online agency as a broker, they would have a customer care number on which you can call and can place your order regarding the buying and selling transactions of shares. They will make the transaction on your behalf. One thing that you need to be familiar with is that the order you place will remain valid only till the same day or maximum the very next day. If the purchase or the selling price of the shares is not reached within the time frame, your order gets automatically canceled, and you have to place the new one. Mentioned below are some practical factors that need to be considered while anyone start investing in the share market:
Analyzing your investment needs and make decisions accordingly Planning the investment strategy once you become clear with your vision. Then scrutinize the stocks that can meet your investment criteria Trying to buy the shares at the time when the market is vulnerable. It would help you yield better returns Avoiding unnecessary risk by ensuring that you have made investments in a variety of stocks
Mistakes to Avoid While Investing Money in Share Market
One needs to avoid the following seven common investing mistakes to ensure your money is secure and the risk is minimal:
1) Holding Onto Dud Shares
It is one of the most common mistakes that is repeated by many investors in the stock market, as holding onto dud shares for a very long period could be devastating for you. Many people think this way that the share prices are ultimately going to be average out, and they may get handsome returns on their investment in direct equity. It tends them to make this mistake. It happens with many investors that they purchase shares of some big, renowned company that they think will give higher returns in the future. Also, the investors believe that the company they are investing their money into is too big to fail. However, this plan doesn’t always work for everyone. It is advisable to get rid of those dud shares that have not risen even after a long time, which are adversely affecting your investment portfolio.
2) Having Control Over The Market
One thing to keep in mind is that you cannot predict the market movement. If you think that you are gauging and you can control the market with your knowledge, then you are strategy will not be going to favor you. There is no specific trend that any market follows. Hence it is a futile exercise if you think of controlling it. As an investor, you should analyze, project, and evaluate the market behavior but never think of timing the market. Of course, there are many political, domestic, and international factors that may affect the market, either positively or negatively, but one cannot be assured that how much and when the market is going to slump or upsurge.
3) Borrowing the Money to Invest
A colossal mistake often made by investors is when they borrow money to invest in this volatile market. It is not us, but any other financial advisor or planner will tell you in prior, that borrowing money for investing in shares is not a good idea. The interest that you have to pay on the borrowed fund will negate the profits you will earn on the selling of the shares. Moreover, if the prices of stocks face fall, then you have to bear a dual loss of paying the interest and incurring the loss on the amount already invested in shares. Many times, people fall into this trap and, ultimately, end up paying a substantial amount from their pocketbook. Hence, it is always recommended to increase your investments by investing with what you have slowly.
4) Letting go of your SIP’s
SIP is the Systematic Investment Plan, which is an investment strategy while you invest your money into the stock market. It works on the principle of ‘rupee cost averaging’ which implies to buy more units when the price is low and lesser units when the prices are sky-high. SIP’s often give greater returns that are comparable with the excellent performing stocks. It is one of the biggest mistakes done by numerous investors that they tend to stop their SIP’s just because they think of deploying their funds elsewhere where it could give higher returns. Apparently, what happens, in reality, is they withdraw the same after incurring significant losses.
5) Listening to Others
Do not blindly trust people who provide you with logical tips and invest your money into those stocks. If you are following others and getting fascinated by hearing stories of overnight millionaires, be prepared for some brutal shocks down the road. Following tips of seasoned investors may even prove out to be favorable for you sometimes when you have limited knowledge as you get to learn from their experience. Still, at the same time, it can be deteriorating for your career and money if you are getting entirely dependent on them. Furthermore, information has a trickle-down effect as you may miss the bus by the time you execute the advice of others. Such investments could wipe out your entire income. You can get a robust understanding of how the stocks perform over a period if you scrutinize the technical charts and company reports in which you have invested your money and purchased the shares.
6) Thinking Short Term
Traders generate profits over a short period and always consider doing transactions keeping a short term approach. Whereas, an investor is the one who wants to build his wealth over the long term. He always focuses on a long term approach. Equity is considered to be one of the best class assets that one could invest in. Equity shares are always known to be giving massive returns in the long run. You may also experience short term gains in some types of stocks, but the possibility of losing your money and ending up bearing a huge loss is also highly anticipated. If your primary profession, knowledge, and proficiency are not into share trading, and you are an ordinary investor, then always look for long term investments.
7) Falling to Diversify
It is an investor’s fallibility if you are investing in a few and limited concentrated positions. As a proficient investor, you ought to be able to stick to the principle of diversification. Remember, as a general thumb rule, it is never recommended to allocate your money to one type of investment. An ideal investment portfolio is the one that is built by allocating the money into all major sectors. It also minimizes the risk and not let your morale fall apart. In order to optimize your return, it is recommended to diversify your investment portfolio across asset classes in regards to your long term investment goals and the risk appetency.
8) Not Being Patient
‘Patience is a virtue, Don’t give up’- It is actually true. It is essential to understand that if you invested some amount in buying shares and the market collapsed, it is no solution to liquidate it today because you will have to bear a considerable loss that way. The only approach you should follow that time is to keep patience and wait till the time market experiences an upswing. If you have invested the money into a reliable company and has exhibited consistency in its stock prices, the only thing you need to do is wait and be patient. The right time will provide you with good returns for sure! Conclusion You can opt for several specialized courses for many other professions and streams of businesses; however, if you want to dive into the extensive market, you cannot avail of any courses. You only need to know the basics to commence your journey as it does not require you to understand a rocket science theory to be an exquisite investor. A little bit of knowledge and expertise that you will gain with the time and reading guides like this is a key to yield massive returns. We hope that this guide to start investing in Share Market will help you solve all the questions you might have in your mind before you invest your money in the stock market.
