Beginners Stock Market Guide – Start Investing in Stocks
The stock market or share market offers a lucrative opportunity for newbie investors wanting to earn large profits. The primary and secondary markets facilitate the buying and selling of stocks for investors. Companies sell their ownership through shares, which are securities validating an investor’s ownership of a company.
You can invest in newly-listed shares when private companies open up to the public. Alternatively, you can purchase shares from the secondary market from other investors. Regardless of your investment method, make sure to have a proper understanding of the stock’s fundamentals and the risks of your investments.
The following sections will explain all you need to know about stock investments as a beginner.
What Is the Stock Market?
The stock market is the financial marketplace where shares of publicly listed companies are bought and sold. There are two parts of the stock market- primary markets, where new shares are issued and secondary markets, where these shares are traded among investors.
Stock exchanges are an essential part of the stock market. It is a platform, where millions of people can trade shares and other securities. India has 2 major stock exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Who Regulates India’s Stock Market?
The Securities and Exchange Board of India (SEBI) regulates India’s stock market. SEBI is responsible for protecting, promoting, and maintaining the securities market in this country. Only SEBI-authorised Depository Participants (DPs) can participate in stock market trading. RBI regulates debt investments and interest rates, which indirectly affect the stock markets.
Therefore, you can not directly participate in the stock market, except through SEBI-authorised DP sell or purchase shares on your behalf.
Why Is the Stock Market Important?
Running a business requires large capital investments to develop and maintain facilities, grow inventory, expand operations, clear outstanding debt, etc. A growing business cannot always depend on banks for loans as they would, otherwise, be overburdened with debts. That is why the stock market is essential for the economy as it allows companies to grow with funds from the public.
In turn, investors benefit from stocks as it grows over time, allowing them to book profits. As the value of the company appreciates, investors get the chance to increase their profits. Furthermore, many companies distribute their profits among shareholders as dividends.
Governments also benefit from a growing stock market as their income increases through taxes. This allows them to increase spending which improves the country’s development. Overall, stock markets play an essential role in developing a country’s economy.
What Are the Primary and Secondary Markets?
You need to know about the two types of stock markets. These are:
The primary market allows corporations to list their shares for sale to investors. Transactions occur between a corporation and an investor, and the share prices are set by the company itself.
There are 3 primary market issuances which are as follows:
- Initial Public Offering (IPO)
IPO is the process through which a corporation or private venture offers its share to the public for the first time.
- Right Issue
Right Issues are additional discounted shares offered to existing investors for purchase within a specified time. Shareholders have the choice to either accept or reject their invitations. However, right-issue shares are not available to the general public.
- Private Placement
Private placements are a type of offering that refrains from putting up their stock for the public, rather the offers are only limited to a particular group of sophisticated investors.
The secondary market is also referred to as the stock exchange. It allows traders to exchange their shareholdings for money. The prices here depend on market supply and demand and various other factors.
Investors can trade their purchased securities from the primary market like bonds, shares, options, futures, etc in the secondary market without the involvement of the corporation.
Things to Consider While Investing in the Stock Market
It’s quite normal for beginners to get nervous when picking stocks for the first time. To help you out, the section below lists the things you need to know before investing in stocks.
- Preparing an Effective Plan
Every investor has a distinct financial goal. You should choose stocks which offer returns that will let you fulfil this goal. For example, you could have the long term goal of building a retirement corpus. In that case, you should select stocks that will let you grow your wealth at a steady pace.
Furthermore, you need to understand your financial situation and risk-bearing capacity and proportionately invest in high and low-risk shares accordingly. To determine a corporation’s growth prospect and market demand, you also need to thoroughly research things like its products/services, competitive advantages and financials.
- Opt for Mutual Funds to Lower Risks
Before getting further into stock market analysis, one needs to have a clear understanding of what mutual funds are.
Mutual funds collect funds from multiple investors and invest them in a diverse portfolio of assets, like stocks, bonds, and other securities as per the investment objective of the scheme.
Investing in shares involves high risk due to volatility, whereas mutual funds diversify their holdings in different asset classes to mitigate risks. Even if one share drops in value, other assets can cover up the shortfall. Moreover, mutual funds can also invest in bonds, government securities, gold and other assets which help you reduce the risks of an equity-heavy portfolio.
What to Look for in a Company before Investing in Its Stock?
A corporate’s market prospect can be roughly analysed by studying the following 5 criteria.
- Price to Earnings (PE) Ratio
Price to Earnings Ratio is the ratio of the current share price of a corporation to the earnings generated per share. A high PE ratio indicates an overvalued stock, whereas a low PE ratio indicates an undervalued stock.
- Debt to Equity (DE) Ratio
The DE ratio divides a company’s total debt by its shareholder’s equity. Therefore, a high DE ratio would suggest high indebtedness of the company.
- Price to Sale Ratio (PS Ratio)
PS ratio can be calculated by dividing the stock price of a company by its annual sale per share. Therefore, lower PS ratios indicate an undervalued stock and are generally preferred.
A highly volatile stock’s value may rise and drop unpredictably, making it difficult for investors to withdraw or invest money. However, a low-volatile stock rises and drops steadily, allowing investors enough time to withdraw capital, if they sense a market downtrend and vice-versa.
Dividends are payments allocated to the investors by a company out of its generated profits. You must check for the consistency and growth in dividends paid, by analysing the history of dividends allocation over the past few years. Dividends help to determine how much stable income you can earn by investing in a company’s shares.
All these aforementioned ratios vary with each industry. some ratios are applicable to particular industries whereas some aren’t. You need to evaluate the ratios on a relative basis.
Demat and Trading Account
A Demat or dematerialised account was introduced in 1996 by SEBI to store all your purchased securities and certificates in digital format. However, Demat accounts are not capable of transaction and only acts as a repository for your assets.
To execute transactions, you will need a trading account that connects your Demat account to your primary bank account. The trading account lets you place buy or sell orders on a stock exchange. Transactions executed through a trading account will debit/credit securities and cash from your Demat account and bank account, respectively.
It is mandatory to have a Demat and a trading account to purchase and sell shares. Though, you can have a trading account without a Demat account if you want to trade intraday, stock brokers generally don’t allow due to various risks attached to such transactions.
The Central Depository Services Ltd (CDSL) and National Securities Depository Ltd (NSDL) are the two depositories in India in charge of maintaining Demat accounts. Depository Participants (DP) such as banks, NBFCs and stockbrokers, serves as an agent for these depositories.
How to Open a Demat Account and Start Trading?
To open a Demat account, you need to register yourself on a brokerage platform of a DP. Usually, brokers provide both Demat and trading accounts in a bundle. Therefore you don’t need to separately apply for a trading account.
Here are the steps to open a Demat account in India:
Step 1: Go to the webpage of a reputed DP or brokerage services and register for a Demat account.
Step 2: Fill up the online account opening form with the necessary details.
Step 3: Add the details of your bank account.
Step 4: Upload the required documents as prescribed by SEBI including the mandatory PAN.
Step 5: Sign the DP agreement, which includes all your rights and duties as an investor.
Step 6: Complete the In-Person Verification (IPV) through an agent or send a scripted video.
Step 7: Sign the application digitally using your Aadhaar number and registered phone number.
Step 8: Submit the form and wait to receive login credentials.
Step 9: Sign in to your Demat account through the online brokerage service portal and start buying and selling stocks.
Step 10: Post purchasing the stock, your primary bank account will be debited and your Demat account will be credited with the number of shares purchased within 2 days from the transaction.
The stock market holds the key to generating a significant return over time. It is subject to high risks and it takes years of experience to comprehend market trends and chart patterns. However, it is never too late to start learning about the stock market and start investing.
As a beginner, you can start with a smaller capital investment, and climb your way to the top.
Frequently Asked Questions
What instruments are traded in the stock market?
The stock market trades in shares, bonds, derivatives, ETFs and mutual funds.
Where can I find stock-related information?
You can easily analyse a company’s financial profile through your brokerage service’s portal, or you can find it on the websites of NSE and BSE. Further, you can also access it on the respective company’s website.
What are the timings for trading stocks in India?
The stock market timing in India is from 9 AM to 3:30 PM. However, NSE and BSE allow investors to place after market orders even after the closing time. These orders are placed when the market opens on the next trading day.
What are bear and bull markets?
Bear and bull are market terminologies that indicate ongoing market trends. A bear market refers to a phase where stock prices fall in general, whereas a bull market refers to a phase where stock prices continue rising.
Are stock market returns taxable?
Yes, long-term capital gains (LTCG) from shares above ₹1 lakh per year are taxable, whereas short-term gains are taxable at 15%.