How to Invest in the Share Market?
Mar 04 2022 6 Min Read
Investment
When an asset is purchased with the intention of generating income or creating wealth through it is referred to as an investment.
An investor may earn money from their investment in two ways. One, if they invest in a tradable asset, they may be able to benefit from it. Second, if they invest in a return-generating plan, like rentals, they will make money through the accumulation of gains.
Share market
A share market is a market where shares are traded. On a stock exchange, you may only purchase and sell equities that are listed on the exchange. Buyers and sellers come together on a stock exchange.
Why invest in the share market
We invest in shares to grow our wealth over time. While some people consider shares to be a risky investment, several studies have shown that investing in the appropriate stocks for a long time (five to ten years) may give inflation-beating returns. People can have short-term strategies as well when investing in the share market. While stocks may be quite volatile in a short period, buying the proper stocks can help traders earn quickly.
How to invest in the share market
People try to invest their extra money to make their fortune. The share market is an excellent location to do so. People who trade in shares have the flexibility to work from anywhere they want, anytime they want.
Anyone may now start trading with the use of electronic trading accounts.
Steps you can follow to invest in the share market properly
Broker
Two platforms are generally used in India for Stock Exchange:
- Bombay Stock Market (BSE) – The longest-serving stock exchange of Asia functioning since 1875
- National Stock Exchange (NSE) – The biggest stock exchange in India
The first step for retail traders is to register with brokerage companies or Depository Participants (DPs) so that they can access the stock markets. It is crucial to pick the correct DP, since they are used by ordinary investors to buy, sell and store equities. They create a user interface for every investor to engage with the stock market. Opening a 2-in-1 Demat + Trading account with a DP is better, since such accounts enable an investor to trade stocks comfortably. Such an account is also advantageous since it allows investors to see their holdings at a single glance.
Some DPs also provide their users with real-time market data. An investor should, therefore, be cautious while selecting their broker or DP. Once they have chosen a DP, they can move to the next documentation step.
Documents
In order to trade in stock markets, an investor needs a Demat account for holding their positions and a trading account for executing their transactions. To do so, the following documents are required:
- Address proof
- Identity verification
- e-KYC – Some DPs will let you electronically link the AADHAR card to the trading account, avoiding the need to scan the AADHAR card manually.
Additional information, such as an annual wage range, may be needed.
Understand trading and investing
After an investor has submitted all of their papers, the DP will double-check their information and then provide the login information to the investor. They may now connect to their account and begin trading using these data. A person can use one of two strategies:
- Trading: This technique enables investors to profit from short-term price swings. Intraday traders who close all their positions by the end of the day use this technique. The goal is to take huge, voluminous positions and sell at the first sign of a price change.
- Investing: Unlike trading, investing entails possessing the holdings for an extended length of time. The idea here is to locate undervalued businesses, acquire their shares, and maintain their position through the transient market ups and downs.
Company selection
It is critical to undertake comprehensive research on a company’s background before purchasing its shares. A trader should consider the following things:
- The firm’s revenue model
- The stability of the company’s management
- The company’s rivals, and so forth.
Diverse portfolio
It is critical to have a broad and diverse portfolio while investing in the stock market. As a trader, an investor must diversify their portfolio to ensure that it is not overly exposed to the ups and downs of a single industry. Traders could also consider investing in large-cap firms for consistent but low returns, as well as small-cap companies for higher but less predictable profits.
What factors do I consider before investing in stocks?
When an investor decides to buy a stock to invest in, it is critical to complete their research before putting their hard-earned money into it. When purchasing a stock for the long term, an investor’s objective should be to locate good value. However, before investing confidence in a firm, an investor should conduct comprehensive research, assess the stock’s fundamentals, and determine whether it is a good fit for their portfolio.
Investors should always remember that they are not simply buying a stock; they are also becoming a stakeholder of that firm. Therefore, they must do their homework as an investor.
Before an investor buys any stock and spends their hard-earned money, they should identify a few crucial things about a firm to understand whether it fits in their portfolio.
- Time: Before buying a stock, it is critical for an investor to determine and choose their time horizon. Depending on the financial goals, the investment time horizon might be short, medium, or long term.
- Short-term investing: A short-term time horizon is defined as any investment that is expected to hold for less than a year. If an investor wants to buy a stock and hold it for less than a year, they should look for solid blue-chip firms that pay dividends. The firms have a strong financial sheet and are less vulnerable to risk.
- Medium-term investing: A medium-term investment is one that an investor can plan to keep for one to ten years. Quality developing market equities and stocks with a moderate level of risk should be considered for medium-term investing.
- Long-term investing: Finally, long-term investments are any assets that can be kept for a long period. If something goes wrong, these investments have time to recover and can provide a considerable return.
- Strategy: Before purchasing a stock, an investor should research numerous investment techniques and select the one that best matches their investing style. The three main types of tactics utilised by the most successful investors are listed below:
- Value investing: Value investing is when an investor buys stocks that are inexpensive compared to their rivals in the hopes of making a profit. It is said that Warren Buffett had used this approach to generate massive riches.
- Growth investing: Growth investing refers to stock purchases that have outperformed the market in terms of sales and profitability. Growth investors feel that these stocks’ rising tendencies will continue, providing an opportunity to benefit.
- Income investing: Finally, investors should seek out high-quality stocks that pay out big dividends. These dividends provide revenue that may be spent or reinvested to boost earnings potential.
- Fundamentals: Every investor should check certain fundamentals before they go ahead and start investing in stocks. The following are some of the most significant ratios to think about:
- Price-to-earnings ratio: The price-to-earnings ratio compares the stock price to the earnings per share of the firm. For example, if a firm trades at Rs. 20 per share and earns Rs. 1 per share yearly, its P/E ratio is 20, meaning that the share price is 20 times the company’s annual profits.
- Debt-to-equity ratio: The debt-to-equity ratio is used to calculate how much a firm owes. High debt levels are bad since they indicate bankruptcy.
- P/B ratio (price-to-book-value ratio): This ratio compares the stock price to the net value of the company’s assets, then divides by the number of outstanding shares.
- Pattern of shareholders: Investors should look at the ownership pattern before purchasing a stock. Promoters are individuals or organisations with a significant impact on a company. They might own a significant portion of the firm or hold prominent management roles. So, investors should look for firms with large promoter ownership, a large domestic institutional investor holding, and a large foreign institutional investor holding.
- History of dividends: Dividend stocks are well-known for paying out a portion of their profits to shareholders in the form of dividends. These dividend stocks should be considered by investors following the income investing method. If the investor’s purpose is to create income from their investments, they should research the company’s dividend history before purchasing its stock. Income investors should look at the company’s dividend yield, which is indicated as a percentage, if they want a high level of income compared to the stock’s price.
- Volatility: On optimistic days, stocks with high volatility will climb swiftly, and on negative days, they will crash like a brick. If you invest in a low-volatility stock that moves slowly and a recent rise reverses, you can cash in your gains before they vanish. Stocks with rapid moves, on the other hand, do not allow you much time to quit the investment, and when a trend reverses, you may lose money.
Before an investor purchases and adds any stock to their portfolio, they must ascertain that they are purchasing the top firms. Stock screeners such as StockEdge can assist an investor in identifying firms that satisfy their investing or trading criteria.
An investor can choose to begin with a small amount of money if they wish. It’s more involved than just picking the appropriate investment (a challenging task in and of itself), and they must be conscious of the limitations of a rookie investor.
An investor needs to conduct some research to establish the minimum deposit requirements and then compare commissions to those offered by other brokers. It’s unlikely that an investor will be able to diversify their portfolio while spending a small amount of money on specific stocks. They may also have to decide on a broker with whom they want to create an account.
Frequently Asked Questions
A share market is a market where shares are openly issued and exchanged.
We invest in shares to grow our wealth over time. While some people consider shares to be a tricky or speculative investment, several studies have shown that investing in the appropriate stocks for a long time (five to ten years) may give inflation-beating returns, making them a better alternative than real estate or gold.
Strategic share market trading may help an investor augment their income, and disciplined trading over time can help them replace it. People who trade shares have the flexibility to work from anywhere they want, anytime they want.
When an investor decides to buy a stock to invest in, it is critical to complete their research before putting their hard-earned money into it. When purchasing a stock for the long term, an investor’s objective should be to locate good value.
