A ‘share market’ is a place (actual or virtual) where shares of listed companies are issued and traded. Share markets facilitate raising capital for these companies in exchange for their shares. For a shareholder, it is a way of participating in the growth of the companies’ businesses by owning the shares as well as liquidating those shares to earn profits on their investments.
In India, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the two primary stock exchanges.
Earlier, shares had to be purchased or traded on the floor of the markets. Today, it is done electronically. Trading of shares is exclusively done through stock brokers and brokerage firms registered with the Securities and Exchange Board of India (SEBI).
So how does a beginner invest in the share market? Here the steps to follow in order to invest in the markets.
One is required to apply for a Permanent Account Number (PAN) in order to begin investing in the share market. PAN is a requirement by the country’s tax authorities to monitor one’s tax liabilities. So there are chances, that one already possesses a PAN Card.
As mentioned earlier, any trading in the share markets has to be done through brokers and brokerage firms. A majority of the private have brokerage licenses with robust trading platforms, research teams and assistance for trading. The drawback about these services is high brokerage rates. However, in recent times, there has been a growth of discount brokers, firms that exclusively facilitate ‘no-frills’ trading for seasoned investors at exceptionally low brokerage rates. It is recommended that new investors go with assisted trading provided by banks.
Shares cannot be stored physically. Hence, a Demat (De-Materialized) account holds the shares that are purchased and releases them as they are sold in the name of the investor. Demat account provides a statement of the shares held by the investor.
Trading account actually facilitates the purchase and sale of the shares. One is expected to open a Demat account along with a Trading account. Opening one account with the other cannot facilitate a trade in the share market.
Demat and Trading accounts can be linked to an existing bank account if the former is opened at the same bank, which also is a brokerage agency. For example, an existing HDFC Bank savings account can be linked to a newly opened Demat and Trading account with HDFC Securities.
Your broker or brokerage firm will also appoint a depository participant, which acts as an agent between the brokerage firm and the depositories, providing an account of the purchase and sale of shares done by the investor. It is a third-party function, which doesn’t directly involve the investor. The two depositories that actually hold your shares are ‘National Securities Depository Ltd.' (NSDL) and ‘Central Depository Securities Ltd.' (CDSL).
In the case of investors investing over Rs. 1 lakh or more for a single trade, they’re required to obtain a Unique Identity Number.
The investing in the share market is not a walk in the park. One can lose a serious amount of money if one does not make informed choices with the purchase and sale of shares. The returns from share trading are too lucrative. The losses are equally heartbreaking if rash decisions are made.
As an investor, it is absolutely necessary to have complete knowledge of the share market, before making any investment.
No one probably feels like losing money in stock market. In the market, the pain of losing money is much greater than the happiness of earning some. If you’re thinking of making an investment in the stock market but worried about ending up with loss or the very thought of loss upsets you, you shouldn’t invest in stock market. Through this article, we will help you understand how the market works and why prices go up and down. Moreover, we will also discuss how to start with the stock market for the novice, for trading and investment perspective.
What comes to your mind when you listen to the word “stock market”?
The answer to this question would be quite different to people based on their level of understanding of the market.
If you ask me, what comes to my mind, here’s a small list-
2. Trading screen
3. Warren Buffett
4. Profit and loss
5. Excitement and many more
Before going deep into this, let’s start with the very basics of stock market.
What is the stock market?
The stock market is a mechanism in which the shares of publicly traded companies are issued, bought and sold. It is one of the most important parts of the free market economy. The stock market helps your small money grow into big sum and becoming wealthy without involving the risk of starting a business. To many people, the stock market is nothing more than a gamble, but it isn’t actually a gamble.
Say you invested Rs 500 on one roll of a dice, where on your win you gain Rs x and in case of loss, you lose the entire Rs 100. While you invest in stock market, it’s hard when you will lose all your money unless there’s a serious problem with the company like in case of Kingfisher Airlines and there’s nothing much to explain in this regard.
How does stock market work?
The rise or fall in stock prices is determined by a number of factors which includes demand and supply, political or social unrest, media, availability of suitable alternatives, the opinion of renowned and big investors like Rakesh Jhunjhunwala, natural disasters etc. These factors along with suitable information help create bullish or bearish sentiment in the economy.
Accordingly say if the number of buyers is more than sellers, stock prices will certainly go up. Similarly, the stock price will tend to fall if numbers of sellers exceed the number of buyers.
What makes the stock market so unpredictable?
Let’s explain this discussion with an example. Say the stock prices have been rising for several years so few investors will sit on the sidelines holding cash and waiting for the opportunities to go short. But the point is that how to judge exactly when the selloff will take place. The important question here is that if you are on the sidelines, how to understand that when to get inside the market? However, if you are already in the market, how to judge when to exit the position. If making the prediction about the market were so easy, then these questions would have been answered easily but actually, it’s not the case.
Now since we are done with the basics of stock market, let’s understand how a novice can start with stock market-
When is the right time to invest in stock market?
Are you willing to learn or planning to build your career in the stock market?
So what are you waiting for?
If you are concerned about your age to learning in markets, let me tell you that there is actually no age to learning or doing anything in life.
There’s a famous quote by Martin Luther King (Jr) which says-
The time is always right to do what is right.
Let me take two examples to show that there’s actually no age to do anything in life-
The first example is of Harland David Sanders (the man behind the KFC), who started his career in his 40’s and he franchised his secret recipe “Kentucky Fried Chicken” at the age of 62. Soon after that, he got very successful.
The next example is of legendary investor, Warren Buffett who started his career at the age of 11. If you are new in the field of the stock market, you must know or have heard about Warren Buffett. He is a renowned investment guru and one of the most respected and richest businessmen in the world.
How to start with the stock market for the novice?
1. Start with Warren Buffett’s letters to shareholders (which is like the bible to investors). It may so happen that you face a problem with some aspect of the letters but these letters are supposed to be read and re-read again and again to keep gaining the wisdom and knowledge of it.
Download the shareholder's letter of Bershire Hathaway (Warren Buffet’s company).
You may click on the links below to learn the key lessons from some of the letters of Warren Buffett.
Letters of Warren Buffet Part 1
Letters of Warren Buffet Part 2
Letters of Warren Buffet Part 3
2. As a novice, you should read business newspapers like Economic Times, Business Standards, Mint etc and watch business channels like CNBC, Zee Business etc to get a hang of the market.
To know what are the important things you should read or how to conduct business newspaper analysis, watch the video below.
3. Start reading books like
a. One up on Wall Street by Peter Lynch
b. The Intelligent Investor by Warren Buffett
c. Learn to Earn by Peter Lynch
Two important tips to keep in mind in stock market are as follows-
i. Start early
ii. Money management techniques
Once you gain the basic understanding of the market, we’ll move on to the next level.
Stock Market for trading minds
If Charts and technical pattern interest you, it seems that you are drawn towards Technical Analysis. So if you are new to this field, here are few guidelines you can follow to build your base in Technical analysis.
1. Read good Books
Start with good books on Technical Analysis like-
a. Reminiscences of a Stock Operator by Edwin Lefevre
b. Trading for a living (By Alexander Elder)
c. Technical Analysis of the Financial Markets (By John J Murphy)
d. Japanese Candlestick charting techniques (By Steve Nison)
e. Encyclopedia of chart patterns (By Thomas Bulkowski)
If you are willing to learn technical analysis from very basic, you can take up a course at elearnmarkets.com. Click here to know more about the Technical Analysis Course certified by NSE Academy.
Start with virtual trading
Paper trading is a good way to track your performance and understanding on the subject. Moreover, you can use NSE Paathshala for virtual trading. This process is very important before entering into the actual trade in the market.
You should also understand market Psychology. It plays a very important role in trading just like in a game of chess or in athletics. As a trader progresses from novice to expert, the understanding of both individual and crowd psychology becomes extremely relevant to become a successful trader apart from gaining the basic knowledge like chart patterns, risk management, market structure etc. With the market becoming extremely competitive day by day, traders are facing a lot of challenges which are sure to test their skills and limit of their psychologies.
Stock Market for Investing minds
Books should always be the first step
Someone has rightly said-
“Books are one’s best friend”
Some of the good books on fundamental analysis are as follows-
1. The Intelligent investor by Benjamin Graham
2. Competitive Strategy by Michael Porter
3. The Essays of Warren Buffett by Lawrence Cunninghan
4. Buffettology by Mary Buffett and David Clark
2. Education is important
Fundamental Analysis is a vast subject which starts right from reading Annual Reports and sector reports to analyzing financial statement to the valuation of the company. It’s better to get proper education on fundamental analysis, equity valuation and financial planning. Opt for a NSE certified Equity Valuation and Financial Modelling course on Elearnmarkets.
3. Read annual report of companies
There can be no better piece of information about a company than annual reports. It may look like a collection of pages which companies send at the end of the year and reading it may seem to be a time consuming and a boring job. However, it is a very valuable piece of information about a particular company. In the annual report, the company’s management discusses the important aspects about the company like industry performance, its vision for the long term, opportunities and threats faced by the company, company’s historical performance etc.
Some of the important things which we need to focus while reading the annual report includes-
a. Chairman’s letter
b. Financial highlights- It gives the snapshot of the performance of the company.
c. Director’s report and MD&A section
d. Financial performance- It provides 10 years summarised track record
e. Financial statements
Few of the important areas where we should focus while reading annual and comparing the annual reports:-
i. Debt scenario of the company
ii. Salaries drawn by the key personnel of the company
iii. Actions by the leading shareholders of the company
Blogs are the good source of learning in today’s era where we are so busy with so many works. Reading blogs or articles helps you gain a lot of understanding on the subject and building storehouse of knowledge. Some of the blogs you can start with are given below