- Posted by: admin
- Category: Stock Market
Have you ever been curious about the stock market? Have you ever wondered how people make lakhs and crores by investing in the share market? (Maybe you’ve been a little envious too).
I have always been very curious about the stock market. As a child, I did not really understand anything. For me, the stock markets were a place of enigma, where people went to get rich. I viewed the stock markets through rose tinted glasses. As an adult, although the rose tinted glasses have come off, the fascination remains. I now have a much better idea of the mechanisms and the amount of thought and analysis which goes behind every successful trade.
The amount of study and observation required to even begin making profits is, frankly, mind-boggling. Of course, sometimes if you’re lucky, you might just pick the right stock at the right time and make a humungous profit without any prior study or analysis. But, for the common man, risking lakhs on the off chance of getting lucky isn’t a very attractive idea. No wonder so many people prefer to play it safe and go for fixed deposits instead.
If you just stand in a crowd and utter the words “How is the market today?”, opinions will start pouring in from all directions by the million. You will get tips and help from thousands of people.
But isn’t it a little difficult to just trust the opinions of strangers like that? I mean, you’ll be investing your hard earned money. Don’t you want to make sure you’re not just pouring your money down the drain? And even if you do decide to listen to other peoples’ opinions, how will you know which one is solid and which one is just noise?
That is where I come in.
Look no further. You’ve come to the right place. With gold and shares being the most sought after investment arena for Indian investors, how can a beginner invest in shares. Here is a guide to clear your basic concepts and get started in the stock market. Allow me to enlighten you.
First, let me tell you about the formalities and the things you’ll need in order to trade in shares.
STEP 1: GET A PAN CARD
PAN or Permanent Account Number is a primary requirement for entering into any financial transaction in India. It is a unique 10-digit alpha-numeric number assigned to each individual by the tax authorities for assessing their tax liabilities. A PAN card is required for opening Demat account, investing in mutual funds and a lot of other things. So without a PAN card, you’ll be lost. If you don’t have one yet, apply for one immediately.
If you’re wondering what a PAN card looks like, I’ve attached a photo.
STEP 2: GET A BROKER
You and I can’t go directly to the stock exchange to send in our orders. As simple as I’m trying to make this, it’s not exactly like going to McDonald’s and ordering for a burger.
So you’ll need to find someone who’s actually authorized to buy or sell shares on the market.
Where are you going to find such a person or company?
Luckily for you, such people and companies are called brokers, and they sell their services to people like you and me. Brokers can be individuals or companies or even online agencies that are registered and licensed by SEBI, the Securities and Exchange Board of India.
It is always advisable to compare the brokers and choose the one that suits your requirements.
All you need to do is compare the brokerage companies, find your best match broker that suits your requirements and you’ll be good to go. If you are comfortable with the internet and online transactions, you can even have online broking through discount brokerage companies.
STEP 3: OPEN A DEMAT AND TRADING ACCOUNT
Once you have a broker, in whatever form tickles your fancy, whether it is a person or a company or online, the next step is to open a Demat or dematerialized account.
When you buy shares or other financial instruments, you can’t really keep them in your cupboard. The shares are stored in your Demat account. This is because even when you buy shares, it is not like the they are delivered to your doorstep, all wrapped up in a red bow. You cannot hold shares in the physical form or store them physically. You cannot even touch them to see whether they are real or not. Shares are all stored in the dematerialized form. And that is where the Demat account comes in. Your Demat account will store the shares that you buy from the market through your broker in the electronic form. In fact, the only way you’ll know whether you have actually been able to buy or sell is by looking at your Demat statements.
You will also require a Trading account in order to buy or sell the shares you want. The trading account acts as an intermediary that facilitates the buying or selling. Usually, your broker will take care of all these. Whether you approach an individual broker, a broking firm or online agencies, the demat and trading accounts will be opened simultaneously as one is useless without the other.
Watch this video to know more about Demat account and how it works.
STEP 4: BUYING AND SELLING
For buying or selling of shares, you need to tell your broker about which share you wish to buy, in what quantity and at what price. For example, if you wish to buy 100 shares of Sun Pharmaceuticals at a price of Rs. 850, you need to inform the same to your broker. When the share reaches that price, the transaction will be made on your behalf.
The same thing is done in case of selling. The sell order is processed when the share reaches the mentioned price.
However, the buy and sell orders only remain valid for a certain time, usually until the same day or the next day. Your broker will inform you of the same. If, during that time frame, the buy or sell order is not reached, the order is cancelled and you will need to place a new order.
You can also buy and sell shares by using mobile app, trading software provided by the broker. Some brokers even provide facility to buy and sell shares through their websites.
The buying and selling takes place in stock exchanges like the National Stock Exchange and the Bombay Stock Exchange.
Now that I’ve mentioned the formalities and the prerequisites for trading in the equity market, perhaps I should give you some advice as to how you can actually make profits. The trick lies, as I’m sure you’ve guessed by now, in picking the right share at the right time.
The basic idea behind capital gains is very simple. You buy the stock when it’s price is low, and sell it off when the price increases.
Sounds fairly easy, right?
It is, until the complications come into play.
The first problem would be the fact that there is no fixed timeline which tells us when the prices will fall or rise. For instance, Stock A, whose price has been falling consistently over the past couple of weeks, may suddenly register a sharp rise in price tomorrow. If someone had followed Company A’s business decisions and announcements and invested correctly would have made an enormous profit.
If you want to become a trader then observe which way the prices are leaning and what changes are occurring every day. Study the movement of the companies and figure out which one is most likely to increase in market value. In short, you need to use technical analysis to get to know about the price trend.
If you are planning to invest for the long term then you need to use fundamental analysis to get insight about company’s financial health and performance. Along with fundamental analysis you must know the products or services that company offers. You need to do your own analysis by using fundamental analysis , product information, industry information etc.
So, the million dollar question is, how do you know which stock is going to do well and when?
Unless you were born with the superpower of accurate intuition, the only way to know is through regular study of the stock market.
Let me try to explain it a little better with the help of an example.
I’m sure you’re familiar with the concept of online shopping. I, for one, love online shopping. But what I do most of the time, (and I’m sure I’m not the only one), is browse through the hundreds of products available, and add the ones which caught my eye to my seemingly endless wish list. I buy things mainly during the End Of Reason Sale or the Big Billion Day sales on Myntra and Flipkart. That doesn’t however stop me from checking the prices every other day to see whether they have reduced or not. Buying shares of companies would follow the same system. Unfortunately the stock market does not have a big sale every couple of months, but you can check the prices to see whether they’ve moved in your favor or not.
How does this relate to the stock market?
In order to purchase the share at the right time, you’ll have to follow the trend of the share.
Your chances of incurring a loss go down ten fold if you invest in what are known as blue chip shares. These stocks usually sell for a much higher price. You’ll also need a longer holding period for these stocks.
The above concept will become a little clearer with the following example. Let me draw from my own life experiences to illustrate why blue chip shares are better.
I have been coveting these classic vintage white Adidas sneakers for a little over a year now. Every time I pass by the Adidas showroom, I stop and stare at them longingly. It’s taking me a really long time to save for them, owing to their exorbitantly high price. I could get a pair of cheap knockoffs for one-tenth the price. The reason I haven’t done that is because the quality of the cheap knockoffs would be nowhere close to the original. They would last a year, maybe two, if I was really careful. The Adidas sneakers, however, would last a decade at least. I had bought a pair in 2008, and it’s still as good as new. So I would say it’s definitely worth the wait.
Blue chip shares are similar. If you save up and buy them, unless something goes catastrophically wrong, they could easily yield a high profit in the long run.
If you’re actually serious about getting into the stock market and equities trading, I’m sure you’ve gone through a lot of magazines and newspapers for expert advice.
The most common pieces of advice that any expert on stocks will give you, is to hold the stocks for a longer period of time.
I mean, it’s pretty quite obvious why, right?
Most companies, unless they go bankrupt, grow steadily over a longer period of time. So if you increase your holding time from a month, to say, a decade, the chances of making a profit increases tremendously.
Another piece of advice is to diversify your portfolio; to invest in a variety of stocks from different sectors rather than consolidating your position in a single stock. That way, the risk associated with trading gets diluted.
Billionaire investor Mr. Warren Buffett says, “Don’t put all your eggs in one basket.” That way, if the basket falls, all the eggs break together and you’re left with nothing.
Now, as simple and easy though these pieces of advice might sound, it’s not all that easy after all.
Why do you think?
To follow these advices properly, one needs to have an inordinate amount of patience. Because fluctuations in the short run are not only possible, they are highly probable. You might wake up one day and see that your assets have almost halved overnight. The trick is to bear with it and wait it out. Because if you sell the stocks off then, you might miss the chance to make a killing in the future.
So it’ll take a while to develop nerves of steel. Otherwise the constant tension and worry will bring about premature greying of your hair. And then you’ll worry about the premature greying as well, and it’ll develop into a vicious cycle.
Of course, stock experts tend to trade in the short run and feed off the volatility. But that, like I said earlier, is incredibly risky.
Prior study and analysis is a mandatory prerequisite, though. Like any profession, to succeed in the stock market, you have to devote all your time to it. When you start off, you will probably have a lot of sleepless nights and spend nervous hours in front of the television and your computer.
But even if you do make a few losses initially, don’t dwell too much on it and move on. The experience will make you a better and more wary trader. And once you get the hang of it, it becomes like a game, or so I’ve heard.
So study well, invest well and don’t lose heart if it doesn’t happen the first time. Happy trading/investing