A Beginner's Guide To Investing In The Indian Share Market

Investing in the stock market can be a daunting task, especially for beginners. However, with the right knowledge and approach, anyone can start investing and potentially generate wealth over time. Here are the steps to get started with investing in the Indian stock market:

- Open a Demat and Trading Account: A Demat account is an electronic repository for holding your shares and other financial securities. A trading account, on the other hand, is used to buy and sell these securities. These accounts can be opened with a stockbroker or brokerage firm, either online or offline. Some banks also offer Demat account services. It is essential to link your Demat and trading accounts to your bank account for seamless fund transfers.

- Select a Stockbroker or Brokerage Platform: Choosing a licensed broker or brokerage platform is crucial. They facilitate the buying and selling of stocks on your behalf and provide you with the necessary tools and information. Look for brokers with low brokerage fees, good customer support, and user-friendly trading platforms.

- Fund Your Demat Account: Transfer funds from your linked bank account to your Demat account using net banking, UPI, or NEFT. Ensure you have sufficient funds to cover the cost of the shares you wish to purchase.

- Select Stocks for Investment: Research and analyse stocks before making investment decisions. Consider factors such as the company's financial health, business model, competitive advantage, debt levels, and management integrity. Diversify your portfolio by investing in different industries and market capitalisations (large-cap, mid-cap, small-cap).

- Place Buy Orders: Once you have selected the stocks you wish to purchase, place your buy orders through your trading account or brokerage platform. You can buy stocks at the market price or set a limit price. Ensure you have sufficient funds in your account before placing orders.

- Monitor Your Portfolio: After placing your orders, check the status of your transactions and portfolio. You can view your purchased stocks in the portfolio section of your Demat account. Decide whether to hold the stocks for the long term or exit your positions on the same day.

Remember to assess your risk appetite, investment goals, and financial situation before investing. Start with a small amount and gradually increase your investments as you gain knowledge and confidence.

How to open a Demat account

A Demat account is a dematerialized account that allows you to keep your shares and assets electronically. It is essential for anyone looking to trade in the stock market. Here is a step-by-step guide on how to open a Demat account:

Online Method:

Step 1: Choose a Depository Participant (DP)

You can open a Demat account with a Depository Participant, which can be any licensed bank, financial institution, or broker. Research and compare the brokerage fees, yearly fees, and leverage given by different DPs before making your choice.

Step 2: Provide Basic Details

Fill out an online account opening form on the DP's website. You will need to provide basic information such as your name, phone number, email address, etc. You will also need to add your PAN card details.

Step 3: Add Bank Details

Include your bank account number, account type, and IFSC code. This is necessary for crediting any amounts payable to you, such as dividends or interest, by the issuer company whose shares you hold in the Demat account.

Step 4: Document Upload

Upload your photo, proof of address, and proof of identity.

Step 5: In-Person Verification

You can perform verification yourself at home by recording a short video of yourself, reading out a given script (your name, PAN number, address, etc.). Alternatively, some DPs may contact you to complete the verification process.

Step 6: Form Submission

Submit your form, and your Demat account will be created shortly. You will receive your account details, including the Demat account number and login credentials.

Offline Method:

Step 1: Choose a Depository Participant (DP)

As with the online method, research and compare different DPs before making your choice.

Step 2: Keep the Required Documents Ready

You will need to submit a duly filled account opening form along with passport-size photos, proof of address, and proof of identity.

Step 3: Sign and Submit a Contract

Sign an agreement outlining all the rules, restrictions, and rights connected with having a Demat Account. Read the contract carefully and ask questions if needed. An authorized person from the DP will also sign it, and you will receive a copy.

Step 4: Receive Unique Client ID

Once your account is opened, the DP will provide you with a unique Client ID and other information to access your Demat Account online.

Step 5: Instruction Sheets

The DP will provide you with instruction sheets for depository services like transfers and purchases.

Additional Information:

Types of Charges

There are various charges associated with opening and maintaining a Demat account, which may include account opening fees, annual maintenance charges, pledging charges, unpledging charges, dematerialization charges, rematerialization charges, and DP charges. These fees may vary across different stockbrokers, so it is important to compare and select the right one for you.

Documents Required

To open a Demat account, you will typically need to provide a copy of your signature, proof of identity (such as a PAN card), proof of address (such as an Aadhar card, voter ID, passport, or utility bill), a bank statement or copy of your account passbook, and an IT return or payslip if you are interested in the currency or derivative market.

How to select a broker

Selecting a stockbroker is one of the most important steps you will take when entering the world of investing. You cannot start investing or trading in stocks in India until you have a stockbroker. These stockbrokers offer demat and trading accounts that are essential for investors to buy and sell stocks. Here are some factors to consider when choosing a stockbroker:

• Background and reputation: Check the background of the stockbroker and their reputation. How old are the brokers, and what do their customers say about their platforms? You can read reviews, complaints, and survey the personal experiences of existing users. If you plan to use a mobile app to make investments, check the mobile app ratings on Google or the app store.
• Brokerage and other key charges: There are two types of stockbrokers in India: full-service brokers and discount brokers. Full-service brokers provide advisory services and other premium facilities, along with the trading platform, and charge high commissions. Discount brokers only provide the trading facility, offer low brokerage, and charge a flat fee per transaction. Choose a suitable broker according to your preference.
• Customer service: If you are new to investing or trading, you will likely require customer service. Check the customer service provided by the stockbroker. Try calling their customer care helpline number, and if it takes a long time for the customer executive to pick up the phone, then avoid that stockbroker.
• Trading platforms offered: This is one of the most important factors to examine. Inspect whether the trading platform offered is user-friendly, its interface, latency, and ease of use. Check demo videos of the trading platform on YouTube, and read reviews of the mobile app on Google and iOS platforms.
• Advisory and research facilities: If you need advisory or research reports, check if the stockbroker offers this facility. The stockbroker should also have a good reputation in advisory and research.
• Range of facilities offered: If you are looking for diversified investing and trading options, look for a stockbroker that offers a wide range of services. For example, if you plan to trade in stocks, derivatives, currencies, and commodities, look for a broker that offers facilities to trade in all, not just one.
• Transparency of charges: There should be no or minimal hidden charges while investing and trading. All charges incurred during transactions should be specifically mentioned. Ask the customer care executive about any hidden charges before selecting the stockbroker.
• Tools for education/learning: Many stockbrokers provide education facilities to their clients. For example, Zerodha educates its clients via 'Varsity' and through its blog for free. If you are in the learning phase, look for tools for education offered by your stockbroker.
• Discounts and low commissions are not always good: If you are new to the market, you will need a lot of help with service while getting started. Although it is good to pay less, if you are getting premium facilities at a commission, it may be better for beginners.
• Offline/local branches availability: There are very few offline branches of discount brokers, whereas there are many branches of older full-service brokers. For newbies who are not comfortable online, offline branches can be a good alternative.
• Look for extras/add-ons: Many stockbrokers provide extras like free account opening or no annual maintenance charges. Check for any add-ons and added benefits.

Understanding the basics of financials

Before investing in the stock market, it is important to have a basic understanding of financial concepts and metrics. Here are some key concepts to help you get started:

• Market Capitalization (Market Cap): This refers to the total value of a company's outstanding shares. It is calculated by multiplying the current market price of a company's stock by the total number of shares outstanding. Market cap is often used to categorize companies into large-cap, mid-cap, and small-cap, which represent different levels of risk and growth potential.
• Sales and Profit Growth: It is important to look for companies with consistent and strong sales and profit growth over time. This indicates the company's ability to generate increasing revenue and profits, which can lead to higher stock prices.
• Earnings Per Share (EPS): EPS is calculated by dividing a company's profit by the number of outstanding shares. It represents the portion of a company's profit allocated to each share of common stock. A growing EPS indicates that the company is becoming more profitable over time.
• Debt-to-Equity Ratio: This ratio compares a company's total liabilities (debt) to its total shareholder equity. A lower debt-to-equity ratio indicates that a company is less reliant on debt to finance its operations, which is generally seen as a positive sign.
• Return on Equity (RoE): RoE measures a company's profitability relative to the equity it has raised. It indicates how efficiently a company is using its shareholders' investments to generate profits. A higher RoE is generally considered favourable.
• Price-to-Book (P/B) Ratio: The P/B ratio compares a company's market value to its book value (the value of its assets minus its liabilities). A lower P/B ratio may indicate that a stock is undervalued, while a higher ratio may suggest it is overvalued.
• Price-to-Earnings (P/E) Ratio: The P/E ratio is calculated by dividing a company's current market price by its earnings per share. It provides a relative valuation measure, indicating how much investors are willing to pay for each rupee of the company's earnings. A lower P/E ratio may indicate that a stock is undervalued.

These financial metrics can help you assess the health and performance of a company. However, it is important to consider other factors as well, such as the company's business model, competitive advantage, management competency, and industry trends. Additionally, it is crucial to remember that past performance does not guarantee future results, and investing in the stock market carries inherent risks.

How to place a buy order

To place a buy order, follow these steps:

• Select a stock for buying: You should select a fundamentally strong stock to buy. You can do your own research to find out which stocks you like.
• Place a buy order in the trading account: You can select the stock and click on the buy option. You can buy stocks at the market price or set a limit price of your choice. Make sure you have sufficient funds to buy the stock, otherwise, your order will be canceled by the stock exchange.
• Check the status of the portfolio: Check the order book and transaction history after placing your order. You will be able to see your stocks in the portfolio section of the demat account once your order is successfully executed. You can exit the position on the same day or do nothing to take the delivery of the stocks in your demat account.

How to check the status of your portfolio

Monitoring your stock portfolio is an essential part of investing, and it involves more than simply tracking stock price movements. Here are some detailed steps to help you monitor your stock portfolio effectively:

• Keep yourself updated with the latest news about the company: Be aware of any political, social, economic, or other events that could impact the company's performance. Stay informed about any announcements made by the company as well.
• Analyze the company's quarterly results: Assess the financial performance of the company by examining its quarterly results. Understand the bigger picture by considering the overall economic scenario and be cautious if the company consistently declares below-par results.
• Keep track of corporate announcements: Stay informed about any events that may impact the market price of the company's shares, such as new facility launches, mergers or acquisitions, management changes, or promoter share transactions.
• Monitor the shareholding pattern: Compare the company's shareholding pattern over different quarters to understand if promoters are increasing or decreasing their stake in the company. This can indicate the potential for growth or potential roadblocks.
• Check the company's credit rating: Review the credit rating of the company to assess its financial health. Poor credit ratings may indicate inefficient debt management, which could put the company in jeopardy.
• Track the stock price: While not recommended as a primary monitoring method, you can use a portfolio tracker to monitor stock price movements if you have limited time. However, avoid making emotional decisions based on short-term price fluctuations.
• Assess the promoter's pledge of shares: Keep an eye on the promoter's pledge of shares, as it could be an early sign of financial trouble if they cannot repay the loan.
• Utilize a portfolio tracker: Use a centralized dashboard or portfolio tracker, such as Groww, to monitor the price movements of your stocks in real time.
• Diversify your portfolio: Spread your investments across different industries, sectors, and geographies to reduce overall risk.
• Stay informed and seek advice: Continuously learn about the stock market, seek advice from experts, and stay updated on market trends and news.
• Use online tools and platforms: Utilize online tools and platforms, such as Value Research Online, to manage and track your investments. These platforms offer features like transaction imports, performance analytics, tax statements, and dividend tracking.

Frequently asked questions