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Even before I start with this article I want to explain some basic terms that relate to the stock markets.
Share: A share is nothing but a part ownership in a company. For e.g. If a company issues 100 shares and you own 1 share, you have 1% stake in the company.
Stock Market: A stock or share market is the coming together of buyers and sellers of shares in one place for trading the shares that they hold. It is a place where shares of different companies are traded. The trading of shares in Indian stock market takes place on two stock exchanges – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). There are primary and secondary markets. Primary markets are where a company comes out with an Initial Public Offering (IPO) and lists its share on the stock market. Once the shares get listed they are traded on the secondary market. Since hundreds and thousands of companies list their shares on the stock market, some similar shares are grouped together to form an index. This grouping can be in the form of company size, industry, market capitalization etc.
SEBI: The Securities and Exchange Board of India is the market regulator. Their basic objective is to protect investor interest, develop and grow the stock market while regulating it’s functioning.
Equity and derivative market: Both equities, as well as the derivative market, are a part of the stock market. The equity market deals in shares and the derivative market deals in Futures and Options (F&O).
Trading account and Demat account:
The trading account is where you will place bids for buy or sell orders and a demat account is for holding your shares in dematerialized form.
Analysis: When studying, and researching the stock market you can use various techniques. As the name suggests fundamental analysis is understanding the fundamentals of the business, debt that the company has on books, the profitability and growth that the company can have. Whereas, technical analysis is more about understanding the past and predicting future. It deals with using charts and diagrams to see trends and forecast the future.
Now that the basic terminology is out of the way, I want to share about how you can start investing in the Stock market. As we all know & see in a lot of advertisements that investment in stock market is risky and acts in both directions. However, it works on a simple theory of higher the risk higher the return.
There are two basic ways of investing in the stock market; either directly through trading accounts which can be opened through any of the stockbroker or by investing in mutual funds.
If someone is having enough time to evaluate the investee companies on a regular basis, then he/ she should invest directly, else mutual fund is advisable.
Investment through mutual funds is like sitting in a bus with the well-trained driver instead of driving your own vehicle. You will have a lower chance of accident or a heavy loss, but the downside is that you will run at a limited speed.
Direct trading charges are definitely far lesser than going the mutual fund’s route. However, if tracking and analysis of markets are not done properly, it can result in huge losses.
To start direct trading in the stock market in India, one needs to open a demat and trading account. Demat accounts in India are provided by the two depositories, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) which can be opened through brokerage firms, also known as stockbrokers or share brokers.
These brokerage firms are either established brokerage houses like Motilal Oswal, Share Khan, Edelweiss, India Infoline & Anand Rathi etc. or brokerage departments of most of the private banks i.e. Kotak, ICICI, Axis, HDFC & Standard Chartered etc.
Most of the brokerage houses have their own representative who will advise about buying and selling of the particular scripts or shares and provide other tips. A lot of modules and software are also provided for technical analysis, to make the investment exercise simpler. Few brokers have started robo investment advisory services as well.
Generally, the charges for direct trading vary between intraday trading & trading beyond a given day. They range from 2 basis point to 20 basis points on the transaction amount or value of the shares. They vary from broker to broker, so it’s always better to negotiate these charges at the time of opening the trading & demat account.
Having a trading account with a bank gives you the benefit of earning interest if your money is lying idle. Specialized brokerage houses are recommended to get a better return on your scripts through their advisory services.
Steps to open a share trading account
- Find a broker
The first step is to find out a good stock broker or firm. Stockbrokers are of two types – full service and discount. A full-service broker provides a variety of services along with buying and selling of shares, such as research and advice, as well as retirement and tax planning.
Discount brokers are new to India. A discount broker is a stockbroker who carries out buy and sell orders, at least possible cost. However, he or she provides no investment advice, unlike a full-service broker. Some examples of discount brokers are Zerodha, 5 paisa Capital Ltd. etc
From the above two, I would suggest that one should choose a full-service broker rather than a discount broker, the reason being they provide research and other facilities which are useful for buying and selling of shares. Before finalizing any broker, check how much experience the broker has and their goodwill or reputation in the market. The broker will help you to open both; the trading account as well as demat account.
- Brokerage Charges
Every broker charges, a brokerage fee and certain fees for processing the buy and sell order. The charges differ from broker to broker. The higher the volume traded the less would be the brokerage. Some give discounts based on the number of trades executed. Take all this into account before you open an account. But don’t lose the forest for the trees.
- Complete Know Your Client(KYC)
You can visit the broker’s office or ask the broker to send a representative to your house with the account opening form and the Know Your Client (KYC) form.
You need to fill these up and submit them along with your identity proof and address proof, for e.g. PAN card, passport, Aadhar card etc.
Once your application is verified by your broker, you will be given your client code, using that client code you can start trading through your broker.
And this is how you can begin your exciting journey of investing in the stock market. Stay tuned for my weekly stock trading tips, where I share the companies you should be buying and selling and what research goes in taking these decisions.