Investing in Stock Market? A Step by Step Guide For Beginners

In India, Stock Market Investments are done by few people. It is the grey area for most of the Investors and it is viewed as gamble by elder people. Ever since Harshad Mehta incidence in early 90s, Indian people do not find their comfort in investing in Stock Market. We can learn by this fact that total no. of companies registered with Ministry of Corporate Affairs (MCA) is more than 16 lakh whereas total no. of companies listed on Bombay Stock Exchange (BSE) is only 5542. Out of companies registered on MCA, only 11 lakh are active and balance 5 lakh have since been closed. Likewise, total no. of companies available for trading on BSE is 3500 only and balance are not traded.  This graph may be helpful to understand this -

No. of Companies Registered at MCA vs. No. of Companies Listed on BSE 

However, today scenario has changed and more number of investors are focusing on stock market to tap the multi fold returns in the backdrop of lower interest rates offered by Scheduled Commercial Banks. As per the data available on BSE, Jammu & Kashmir has seen growth of 9351.75% in registered investors during last year and Dadra & Nagar Haveli has seen growth of 27828.13% during the same period. In Last 1 year, total no. of registered investors has grown by 0.40 Crore to 3.65 crore on BSE.

If we talk about the returns which Stock Markets in India has given in last 3-4 years is pretty huge. It is evident by the fact that a Scrip name Indiabulls Ventures Ltd. has rallied almost 1250% during the year making it top pick of the world as reported by Livemint. A scrip of ₹22.05 per piece on 10th November 2016 was closed at ₹294.20 per piece on 10th November 2017. Likewise, Bharat Seats Ltd. a share was trading on ₹81.85 when we have made the investment on 25th May 2017  and it was closed at ₹210.05 per share as on 10th November 2017. An annualized return of 417.65%. Please note that all gains are subject to booking of profits by investors who have bought the stock on the said price in a given period of time.

Chart showing comparative price of Indiabulls Ventures Ltd vs. benchmark Index

However, as they say there is no free lunch in this world, Stock Market Investments are also subject to market risk meaning if stock prices have gone up in the past they could go down as well. Therefore, a beginner needs to understand the difference between an Investment and a Speculation. Investing is a process when you analyze the underlying asset and predicts the outcome based on available information from the public domain whereas Speculation is akin to gambling. If you put your money at risk based on market sentiments then it is nothing but Speculation.

Investment in Stock Market is risky and at the same time it may give lot of returns subject to the condition that you do it right. Therefore, a beginner should always ask these 3 questions to himself before jumping into the Stock Market like any other work.

1. Why you want to Invest?

This is very basic question you should ask before starting investment. If your goal is short term returns and getting rich over a night then it is not what you are looking for and you should buy lottery ticket instead. You should be clear about the usage of money on maturity. Will you be buying an asset or it is going to be your retirement fund or something else? How much amount you can shed, out of your current income easily and whether you are ready to lose this much money in the event everything goes south? However, losing everything depends on so many factors and it is not certainly the one which we are elaborating here. Once you have resolved your Why? Then proceed further.

2. What are risks involved?

Before buying any Stock, you should thoroughly analyze and do your homework on that stock. There are very simple techniques, which may be helpful. If you are having a long term outlook, then you can buy blue chip stocks. Blue Chip Stocks are of those companies which are operating on large scale and have proven track record over the years. Though these securities are not as reliable as gilt edged securities. You can check the company's PE ratio, EPS and other fundamentals. You can also search for what company is doing presently and what plans they have to expand their existing business? All these information you can get from company's annual report and other filings at www.bseindia.com.

3. When you are going to exit?

This is also one of the best strategies to win the Stock Market. You should know that when you are going to exit the market. Suppose, you have bought one stock at ₹10/- per share, then you should keep in mind your sale price at the same time. When prices move up or down, you should be clear about your tenure and target in the particular stock you are buying. If price of a particular share has reached to ₹50/- then you should not think that it will again rise to another higher level. Basically, you should know your sale price.

If you have figured out all these answers then you are good to go ahead. Remember, you must monitor your investment periodically after investment and you must update yourselves about the scrip you have bought from time to time. It will help you in making a decision of exiting the stock or remain invested. If you do not have time for this then we strongly recommend choosing other instruments like Mutual Funds, Gilt Edged Funds etc.

In India, there are many Stock Markets (also known as Exchange) but there are 2 most famous markets. One is Bombay Stock Exchange (BSE) and other one is National Stock Exchange (NSE). Index of BSE is called 'SENSEX' and it is calculated based on the share price of 30 stocks. Likewise, Index of NSE is called 'NIFTY 50' and it is the outcome of movement in share price of 50 stocks, commonly known as "Nifty 50".

Share Markets are being regulated by Securities & Exchange Board of India (SEBI), it is the watchdog for not only share markets but for other markets like debentures, bonds, commercial papers etc. Like Reserve Bank of India (RBI) is the regulator for all the banks functioning in the country, SEBI is the regulator of all the Securities Markets.

For Investing in the Stock Market, you must have following 3 accounts -

1. Saving Bank Account - It is the regular saving bank account which is opened by schedule commercial banks in India.

2. Trading Account - It is ledger of all sell and buy transactions done by an investor with the particular broker. It also contains all the charges debited on account of the stock trading. As per Stock Exchange guidelines, investors must ask for settlement of their Trading Account with the broker on monthly or quarterly basis. You should not keep much balance in your trading account as it is non interest bearing account and anything you keep in it will not fetch any interest unless you have invested in some scrips.

3. Demat Account - In old era, Shares were physically delivered to the concerned investor and all the transaction were manually done.  Stock Markets were the foremost beneficiaries of technological advancements and almost all the activities right from trading of shares to delivery of it, everything got digitized. When shares are digitally delivered to the investor, they are credited to your demat account. Demat accounts are managed by Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL), 2 only depositories authorized by Govt. of India.

Nowadays there are many brokers who are offering trading and demat accounts with a very less brokerage commission rate. You must negotiate with broker on commission and other terms before signing any agreement. You must carefully read all the documents and ask questions, if any. Please note that Stock Market investments are not like your Fixed Deposits or National Saving Certificate, where you need not worry till the maturity date. These investments are very dynamic and subject to market risk. Please watch our video tutorial for Stock Market beginners in Hindi.

We hope this information was helpful. Please take some time and provide your valuable feedback in the comments section below and if you think it is worth sharing then it will make our day.

Happy Investing!