How to Start Investing in Stock Markets?
You
must have heard about something called ‘stock markets’ going up and down
in news and people making a fortune from buying something called ‘stocks’.
So, what are stocks? What is a stock market?
First
of all, stock market is not at all a gambling place. It’s more of an investment
place. And investment means putting your money in something after carefully
studying it and assessing it from all angles, and then waiting for it to grow.
For eg., when you want to make a fixed deposit or FD in a bank , you compare
the interest rates of different banks and try to make a FD in the bank which
you feel is most trustful and which can offer the best interest rates on FD.
Similarly, in stock markets, you put your money in a company after carefully
assessing it.
Ok, so I am
going to talk about some basics of the stock market and then I am going to come
to the main focus of this article which is how can you begin investing in
stock markets?. In simple terms, a stock market is a market where
you trade in stocks of a company (buying stocks simply means you are buying a
teensy-weensy portion of the company) and if that company grows, your money
grows, and if not, then it diminishes. For example, suppose I buy a few stocks
of Reliance. Buying a few stocks of Reliance means I am literally the owner of
Reliance! (though there are millions of other owners of Reliance too). Now,
suppose over a couple of years, the revenues and profits of the company grow,
meaning the demand for the shares of the company grows, so does my money grow.
Now how much my money grows depends on various factors, which I am not going to
explain in detail here. But to give you a small overview, companies like
Infosys, PAGE industries, Reliance, etc. have doubled or tripled the investor's
money in about 3-10 years. In some cases, even in less than a year! Some
companies even give up to 100% returns in a month or so. But note that there
are always two faces of a coin. If you do not invest in the right company, you
are certainly going to lose your money. Remember you don’t have to look at the
stock market as a gambling place, so one has to study the companies and make
sure to invest in the right company.
A very basic but
important question usually comes to the minds of all the beginners, how much
money do we need to start with? There is no specific answer to this
question, but I can tell you that I started with Rs 500 only! If you are a
student or a person with less income, you could start with just Rs 1000 or even
lesser. But if you are a person who is earning good bucks, you could start with
Rs 10,000 or even more. It all depends on your wish and risk appetite. Greater
the risk, greater the money. There are stocks which you can buy for as low as
Re 1 and the best part is you can buy even 1 share also! The next question
usually people think is what is the right age to start? The answer to
this question is again vague. In India, people usually start investing when
they start earning, meaning usually after 25 years of age or so. But the fact
is that even if you are 15 or 50 years old, you could start investing right
now.
Now let’s come to
the main topic, which is ‘how to start?’ To start investing in Indian
stock markets, you need to open a demat account and a trading account with a
broker. If you are a beginner, don't get confused about these terms. I know
these are a bit complicated for a complete beginner, but I would try my best to
explain these in simpler terms. When you buy shares of a company, those shares
are kept in dematerialised form in an account which is known as the Demat
Account. Now, ideally you would think that you would get a proper document
of proof from the company that you have bought its shares or invested in it.
You are thinking this the right way but this used to happen two decades back in
India. Basically, your demat account contains
the shares you bought in a paperless manner.. The demat account contains proof
that you have bought the shares. In summary, like your money is kept in a bank
account, your shares are kept in your demat account.
The
Trading Account contains the money through which you buy or sell the
shares. The trading account is just like a bank account where you use your
money present in the trading account to trade in the stock market.
Now
let’s come to the term ‘broker’. In the simplest terms, a broker is a
middleman who coordinates your buying and selling of your shares in the stock
market and charges you a commission (known as brokerage) for your trades. All
your trading in the stock market has to go through the broker. Just like you
open your bank account with different banks such as SBI, ICICI, etc., you need
to open a trading and Demat account with the broker. Just like you have a lot
of choices to choose from different banks with which you can open your bank
account, there are thousands of brokers in India with which you can open your
trading and Demat accounts. Now, remember that I have explained all these terms
vaguely and not through exact definitions, as I have tried to make all this
simpler through a beginner's perspective.
Now
let's come to the role of stock exchanges in a stock market. Stock exchanges
are the place where you place your orders to buy and sell and these exchanges
regulate the orders between the investors and the companies. There are mainly
two exchanges in India, namely- Bombay Stock Exchange (BSE) and the National
Stock Exchange (NSE).
So,
to summarize it all, you open a demat and a trading account with a stock broker
and the stock broker places your orders on your behalf on the stock exchanges
and the stock exchanges further regulate the buying and selling between
different investors and the companies.
There
are obviously many things left to explain, but I think now you can open your
account with the stockbroker to have a glimpse of the stock market. You could
open your trading and demat account with any broker you like, but I would
suggest you open your account with some discount broker such as Zerodha or
Uptox or 5paisa or any other discount-broker rather than full-time brokers such
as HDFC Securities or Kotak Securities since discount brokers charge a lot less
brokerage (commissions) compared to full-time brokers. Most of the brokers
today offer online quick account opening procedures, so you can open an account
online by just sitting at your place of comfort.
Happy
Investing!