A Beginner's Guide To Investing In Indian Shares

Investing in shares in India can be a tricky process, especially for beginners. Here is a step-by-step guide to help you get started:

- Get a PAN Card: A Permanent Account Number (PAN) is mandatory for entering into any financial transactions in India. It is a unique 10-digit alphanumeric number assigned to individuals by the Tax Authorities for assessing their tax liabilities.

- Open a Demat Account: A Demat Account is required to hold your shares in electronic format. Previously, shares existed in paper format, which carried the risk of physical loss.

- Open a Trading Account: A Trading Account is necessary for placing orders to buy or sell shares in the stock market.

- Register with a Broker/Brokerage Platform: A broker or brokerage platform, authorised by the Securities and Exchange Board of India (SEBI), facilitates the buying and selling of shares. You can open a Demat and Trading Account with the help of a broker.

- Link a Bank Account: You will need a bank account linked to your Trading Account to facilitate seamless fund transfers.

- Get a Unique Identification Number (UIN): A UIN is a SEBI mandate and is required if you are trading with a capital of more than Rs. 1 Lakh. It allows users to claim a tax refund.

Understand the basics of the share market

Understanding the basics of the share market is the first step towards investing in shares in India. Here is a detailed overview of the basics of the share market in India:

The share market is a platform that allows companies to issue shares and investors to trade them. It provides an opportunity for individuals to buy and sell shares of companies listed on the stock exchange. The two primary stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Types of Share Markets:

The share market can be categorised into two types: the Primary Share Market and the Secondary Share Market.

Primary Share Market:

The primary share market is where companies offer their shares to the public for the first time through an Initial Public Offering (IPO). It serves as a platform for companies to raise capital by issuing shares. Investors can apply for IPOs through a net banking process called Application Supported by Blocked Amount (ASBA). The shares are then allotted based on demand and availability, and they are listed on the stock exchange within a week.

Secondary Share Market:

The secondary share market involves the regular buying and selling of shares among investors. It provides a platform for investors to trade shares they have purchased in the primary market or from other investors. Transactions in the secondary market are typically facilitated by brokers or brokerage platforms.

How to Invest in the Share Market:

Investing in the share market requires several steps, including opening the necessary accounts, selecting shares, and executing trades. Here is an overview of the process:

Opening a Demat and Trading Account:

To invest in the share market, you need a Demat account to hold your shares electronically and a trading account to place buy and sell orders. These accounts can be opened with a SEBI-registered broker or brokerage platform. It is often more convenient to open both accounts with the same broker. Additionally, these accounts should be linked to your bank account for seamless fund transfers.

Selecting Shares:

Before investing, it is crucial to research and select the shares you want to buy or sell. Consider factors such as company performance, industry trends, and your risk appetite. Diversifying your portfolio by investing in different industries and market caps can help minimise risk.

Executing Trades:

Once you have selected the shares, you can place orders through your trading account. Specify the number of shares, the desired price, and whether it is a buy or sell order. Your broker or brokerage platform will facilitate the trade on your behalf.

Costs and Charges:

When investing in the share market, there are several costs and charges to consider:

• Transaction costs: Brokers charge a brokerage fee for facilitating trades. Additionally, taxes and dues, such as Securities Transaction Tax (STT), SEBI charges, and Goods and Services Tax (GST), are levied on each transaction.
• Demat charges: There are annual charges for maintaining your demat account, typically collected by your broker or brokerage platform. These charges range from INR 100 to INR 750.
• Taxes: Profits from share market investments are subject to capital gains tax. If shares are held for more than a year, long-term capital gains tax of 10% is applicable. For holdings of less than a year, short-term capital gains tax of 15% is levied.

Instruments and Types of Stocks:

The share market offers various financial instruments and types of stocks to invest in:

• Equity shares: Equity shares entitle investors to receive a portion of the company's profits in the form of dividends.
• Bonds: Bonds are debt instruments issued by companies or governments, representing loans made by investors. They offer a fixed interest rate for a fixed tenure.
• Mutual Funds (MFs): Mutual Funds pool money from multiple investors and invest it in different financial instruments. Profits are distributed among investors based on their investment proportion.
• Exchange-Traded Funds (ETFs): ETFs track specific indices, such as the NIFTY or SENSEX, allowing investors to hold a diversified portfolio of stocks.
• Derivatives: Derivatives derive their value from the performance of underlying assets, such as commodities, currencies, stocks, or market indices.

When investing in stocks, it is important to understand market capitalisation, which represents the total value of a company. SEBI defines large-cap stocks as the top 100, mid-cap stocks as ranks 101-250, and small-cap stocks as ranks 251 and below by market capitalisation. Each category carries different levels of risk and potential returns.

Know the difference between primary and secondary share markets

The primary and secondary markets are two platforms where securities are exchanged. Here's what you need to know about the differences between the two:

Primary Market

The primary market is where new securities, such as stocks and bonds, are issued and sold for the first time through initial public offerings (IPOs). It is a marketplace where corporations issue new shares to the public to raise capital for long-term funding needs, such as extending their current trade or buying a new entity. The primary market plays a crucial role in mobilising savings in the economy.

In the primary market, the exchange of securities happens directly between the investors and the company issuing them. The proceeds from the sale of securities go directly to the issuing company, making it an excellent way for companies to raise capital. The funds raised can be used for various purposes, including debt repayment, business expansion, and launching new product lines.

Secondary Market

The secondary market, on the other hand, is where already issued securities are bought and sold by investors. It is a prototype of the capital market, where investors trade debentures, current shares, options, bonds, treasury bills, and commercial papers. This market can be an auction business, with bond trading taking place through a dealer or stock exchange, often referred to as "over the counter".

In the secondary market, the exchange of securities occurs between investors without the direct involvement of the issuing company. The proceeds from these transactions go directly to the selling investors rather than the issuing company. This market helps provide liquidity by enabling investors to buy and sell securities freely. It also allows existing investors to monetise their investments.

Key Differences

The primary market is where new securities are issued and sold for the first time, while the secondary market deals with previously issued securities. The primary market provides financing to companies, whereas the secondary market does not. The primary market involves transactions between the company issuing securities and investors, while the secondary market involves trades between investors.

Learn how to invest in the primary and secondary share markets

The primary and secondary share markets are two distinct platforms where securities are exchanged. The primary market is where new securities, such as stocks and bonds, are issued and sold for the first time, typically through initial public offerings (IPOs). On the other hand, the secondary market is where already issued securities are bought and sold by investors.

Primary Share Market

When a company wants to get registered to issue their shares and raise money, they rely on the primary market. A company mainly enters the Primary Share Market to raise capital by offering its shares to the public through an Initial Public Offering (IPO). Investments in the primary share market are made through an IPO. After a company receives all the applications made for an IPO by investors, the applications are counted, and shares are allotted based on demand and availability.

To invest in the primary share market, you need a Demat Account, which will carry the electronic copies of the shares you trade with. Along with a Demat Account, you also need a Trading Account, which allows you to buy and sell shares in the market. If you invest in a company’s IPO, you will be allotted a select number of shares based on the market response. Once the company receives all the applications for investing in the IPO, they check the demand and availability of shares. Based on the availability of shares, the allocation to the traders takes place.

Secondary Share Market

Once companies purchase new securities from the Primary Market, they can trade them in the secondary market. These trades offer investors a chance to sell the purchased shares. The transactions in the Secondary Share Market are between investors, wherein one sells and the other buys at the prevailing market price or one decided by the parties. Usually, trades on the Secondary Share Market come with intermediaries like brokers.

To invest in the secondary share market, you also need a Demat and Trading Account. Both accounts should be linked to a pre-existing bank account for seamless transactions. The next step is to log into your Trading Account and choose the shares you wish to sell or buy. Make sure that you have the funds required to carry out such transactions if you are purchasing shares. Also, check that you have selected the correct number of shares while selling the same.

Following this step, you must decide the price to buy the shares and the selling price. The buyer or seller will then reciprocate your request. You can then complete your transaction by transferring the money/shares and receiving the requisite shares/money in exchange.

Find a broker or brokerage platform

People who are authorised to buy and sell on the markets are called brokers. Brokers can be individuals or companies, as well as online agencies, and they must be registered and licensed by SEBI (Securities and Exchange Board of India), which regulates the share markets.

You can find a broker in the form of an individual you know and trust, or you can approach various companies that are licensed to trade and deal in securities in the markets. If you are comfortable with the internet and online platforms, you can opt for online broking through companies like ICICI Direct, Sharekhan, Kotak Securities, IndiaBulls, etc. Remember to do your research before selecting your broking firm.

When choosing a broker, there are a few things to keep in mind:

• Brokerage fees: There are brokerage fees involved in every trade, so it is critical to find a broking partner that understands your needs and has competitive rates in the market.
• Investment instruments: Different brokers offer various investment instruments to choose from. Ensure that the broker you choose provides the investment options you are interested in, such as equities, derivatives, etc.

Opening a Demat and Trading Account

Once you have found a broker, they will help you open a Demat and Trading Account. The Demat Account will hold the stocks or shares in your name, and this will be reflected in your stock portfolio. In India, shares cannot be held in physical form and must be stored in a Dematerialized or Demat state. A Trading Account will act as an intermediary to facilitate the buying and selling of shares. Usually, your broker will take care of opening both these accounts, as one is useless without the other when it comes to investing in shares in India.

Understand the different types of stocks

Stocks can be categorized based on several parameters like class, ownership, market capitalization, dividend payout, etc. Here are some of the different types of stocks:

Types of Stocks Based on Market Capitalization

Market capitalization is a way to classify stocks based on their size. Large-cap stocks are generally more valuable than mid-cap or small-cap stocks and therefore command a higher price. Large-cap stocks are also known as "blue-chip stocks" and are considered more stable and less risky. Mid-cap stocks tend to have higher growth rates but are more sensitive to economic cycles and industry trends, making them less predictable. Small-cap stocks have higher volatility due to their size and liquidity.

Types of Stocks Based on Ownership

The classification of a stock depends on its rights and privileges. Common stocks allow shareholders to participate in the company's profits and provide voting rights. Preferred stocks give shareholders a certain degree of ownership but often don't offer voting rights. In return, they receive higher, guaranteed dividend payouts. Hybrid stocks, also known as 'convertible preferred shares', combine features from both common and preferred stocks and may or may not include voting rights.

Types of Stocks Based on Fundamentals

Most investors assess the financials of the company before buying its stock. Value stocks have a market price higher than their intrinsic value, while growth stocks have a market price lower than their intrinsic value.

Types of Stocks Based on Price Volatility

Some investors prefer stable stocks, while others thrive on price volatility. Stocks with higher beta values are more volatile and carry more risk. Blue-chip stocks from well-established companies like Reliance Industries and Infosys are considered the most stable.

Types of Stocks Based on Profit Sharing

A company can either distribute profits as dividends or reinvest them to grow its business. Income stocks offer consistent dividend payouts and are considered low-risk investments. Growth stocks don't pay dividends, and the company reinvests profits to fuel growth. These stocks are considered riskier, as profits depend on the fluctuating market price.

Types of Stocks Based on Economic Trends

Not all stocks move in the same direction when the stock market reacts to economic news. Cyclical stocks are affected by the economic environment and see high price fluctuations. Defensive stocks, such as those in the FMCG, pharmaceuticals, and insurance sectors, are relatively unmoved by economic conditions and are considered safer investments.

Frequently asked questions