How to start investing in stock market in India- Beginners lesson
A lot of us don’t understand about stock market . One of the main reason is that from childhood , most of Indians are not taught about stock market.Also they consider stock market as gambling and risky when compared to other financial instruments . However , its not risky when investing is done in proper way controlling and managing risk.Lets understand in this article , How to start Investing in stock market in india through this detailed guide for beginners and learn stock market.
What is Stock Market and Share Market
In simple words , stock market is a place where shares or stocks of any listed company is traded over exchanges.
Now that brings many more questions like what is shares , What is public listed company , what is stock exchange and why would i buy share ? Lets understand these questions one by one before learning about investing in stock market
What is Share ?
Share means part ownership of a company. If a company is worth 100rs , and you do 100 parts of company , and keep 50 yourself and 50 to your friend , you become 50% owner of company because you have 50% of shares.
Why people buy share and who sells shares?
When a company starts to grow , it needs money. It can get money through loans . But when it takes loan , it will need to make periodic interest payments. Lets say company takes loan, invests somewhere buy money of sales will come back after 3 months. So company may find tough to make periodic payments to bank . Here comes concept of share now. The person will sell some ownership to other persons/investors who will help with money. Now when company gets money after 3 months , being owner of company , all people will be benefitted.
So investors buy shares and companies who want t o raise money sell shares initially through process called IPO( initial public offering) . After IPO is done and money is raised , the shares will be traded among many other investors from a specific date which is called listing date. On listing date , the stocks which were sold in IPO process will be available for trading over stock exchange and now those who got shares in IPO can sell to others as well.
What is Stock Exchange
As the name suggests , stock exchange is place where “Stocks” or “Shares” are exchanges , or bough and sold. As we have understood that when company allots shares to investors through IPO , it goes into their demat account. Now when the company gets listed after IPO , the shares allocated in IPO can be bought and sold based on demand and supply.
There are two Big Stock Exchanges in India where majority of trades takes place. They Are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) . You dont directly buy and sell of stock exchange. You need to open demat account through which you can buy and sell on exchanges.
Why Shares price will go Up and Down
Its basic law of demand and supply. Share prices go up when there is demand and go down when there is people wanting to sell shares more than buyers. But why would someone willing to buy share of company? well there are many reason
How to Start Investing in Stock Markets
Demat account and Trading account helps you to access stock market for Investing as well as trading . You can open Zerodha Demat account which is India’s biggest stock broker and also best for beginners. Click here for direct link to open Zerodha Demat and Trading account online in 10 minutes . Demat account is the first and foremost thing you need to start investing in stock markets. Once you have opened demat account online, lets see what to do with our demat
There are primarily two ways to invest in stock market in India.
1>Through Mutual Funds
2>Through Directing purchasing Stocks
For beginners, its always recommended to invest through mutual funds. When you purchase mutual funds, you basically give your money to a group of experienced and professional Fund manager who buys and sells shares on your behalf in exchange of small fees called management fees. However they take care of all things and can do it better with less risk and protection of capital. The downside is that your return may be a bit less. Click here to know How to invest in Mutual Funds online – buy direct Mutual Funds
If you have knowledge of stocks , then you can invest in stock market yourself . This is more risky compared to investing in mutual funds, however you have benefits of getting higher returns than mutual funds. You have to select 8-10 stocks from different sectors and create a portfolio of stocks. This is called diversification so that even one stock or one sector doesn’t do good, your other stocks may do good. However you must know how to select stocks for investment for this.
How to select best Mutual Funds for Investment
Now since you have decided to invest in Mutual funds, lets understand how to select best Mutual funds for investment.
Selecting Best mutual funds for investment is a process that has lot to do with your risk , your investment amount and your expected investment duration. It has been established that over period of 7 to 10 years , mutual funds gives good returns of around 12-15% , which is almost double of risk free rate of Bank FD’s
You have to understand returns potential , Liquidity Tax benefits , Flexibility , Total expense ratio , fund manager performance etc for selecting best mutual funds for investmeny
How to Select Best Stocks for investment
To select best stocks for investment , you need to understand Fundamental analysis and how to analyse companies to predict its future profit and loss. You have to analyse company based on past financial performance and predict if future earnings of company is going to increase.A good company has below characteristics
- Good Management
- Good Sales growth
- Good Profits growth
- Mindset to reward shareholders in form of Bonus shares, dividends etc
- Good return on Equity (shareholders fund)
- Good product portfolio
Once you have selected good stocks, you need to create a portfolio with 10-15 stocks and diversify your portfolio. Diversification is a process of allocating small amounts to different stocks to avoid any stock specific risk .