With inflation spiking the prices of everyday necessities, it isn’t easy to manage personal finances. And, if you’re dependent on your salary, you might face a lot of hassles. That’s why investing in the share market is an ideal option to create wealth and handle these rising costs.
Investing your money in the right shares will help you receive lucrative returns in the future. It can help you achieve your long-term financial goals like owning a property. Moreover, share market returns are better than fixed deposits and savings accounts interest rates.
If you’re a beginner investor, you need to understand the basics. These include stock types, stock selection, and portfolio diversification.
This post will offer you all the details on how to invest in share market. Let’s get started!
What is Share Market?
The share market is a platform where you can invest your money in publicly available shares. Buyers and traders can access this platform and invest during specific hours of the day.
Let’s wrap our heads around the basics to understand share market investment.
A company’s capital is divided into multiple shares. The primary objectives here are to grow, raise funds, and expand business sustenance.
You can invest in these company shares on the share market. If the value of the business’s shares increases, you will get capital gains in the future.
If you Google “what is share market?” you’ll find that the market is divided into two categories. These are the primary and secondary share markets.
Primary Share Market
If a company registers in the stock exchange to sell its shares for the first time, they enter the primary market. This situation is called an initial public offering (IPO). After the registration, the company can become public and trade its shares.
Secondary Share Market
The secondary share market is where already enlisted companies trade shares publicly. So, if you’re an investor, you can buy or sell shares at the current market prices. You might require the help of an investment broker or a brokerage company to handle these transactions.
You will also receive an opportunity to exit the market after selling all the shares.
Benefits of Investing in Stock Market
If you are a beginner in the world of stocks, you might think if it’s worth your time and money. You must understand that investing in the right shares, according to your risk tolerance and budget, can fetch you good returns.
Let’s check out the various benefits of investing in share market.
Long Term Gains
As a rule of thumb, the longer you invest your money, the better your returns will be. Over time, if the value of the stock increases, you can gain a better income.
You need to be patient to see your money grow and compound. Moreover, you’ll receive a profit if you invest your money in prospective companies. Investing in multiple stocks will also enhance your returns.
Moreover, if you compare share market returns vs fixed deposits, you’ll notice that the share market is a more profitable option.
Income through Dividends
A dividend is monetary reward companies offer to their investors. These payments are usually made yearly and are great if you’re a newbie investor.
Even if the value of the stock has fallen, the companies will pay you these dividends. You can utilize this income to invest in other shares or save them for the future.
Moreover, you might receive a bonus share from a company that isn’t capable of offering dividends at the moment. Another source of income is a stock split, where the company splits its existing shares for your convenience.
Diverse Investment Options
The share market allows you to invest in various financial instruments such as bonds, derivatives, and mutual funds. This diversification expands your portfolio and lets you explore multiple investment sectors.
So, according to the growth of these sectors, you can build your wealth slowly. It will enable you to learn more about the stock index and Nifty 50, improving your investment decisions.
Before investing in stock market, you must understand the fundamentals of the various investment options. It will help you decide which option suits your financial needs and risk-taking appetite.
1. Stocks
By purchasing shares in a firm registered on the Indian stock exchange, you can become the owner of that company. Individuals and financial institutions use it as a traditional and popular form of investing.
After the Covid 19 pandemic, India’s stock market investment penetration risen exponentially, with the biggest number of Demat accounts were opened in a short period of time.
Benefits of Investing in Stocks
When compared to other investment options, it provides a high rate of return.
Ideal investment for long-term wealth creation.
Investing in stocks has no upper limit.
2. Commodities
You can invest in these physical products and include options like metals, livestock, and energy. You can buy them as a hedge for your portfolio during market inflation. Further, you can buy them through mutual funds, ETFs, futures contracts, and stocks.
Understanding the commodity before investing is essential as its price might change suddenly.
Benefits of Investing in Commodities
- Cost-effective as commodity brokers charge a lesser margin for trading
- Stable returns even during stock market fluctuations
- Ideal for long-term investments and inflation protection
3. Derivatives
Derivatives are financial instruments set between two parties. Its value is decided by the price fluctuations of the underlying assets like currencies and stocks.
You can utilize a derivative to understand the directional movement of a particular asset. Experienced traders usually purchase derivatives as a risk tolerance hedge.
Benefits of Investing in Derivatives
- Convenient determination of the underlying asset’s price
- Acts as a tool for hedging risks
- Low transaction costs as compared to other securities
4. Currency
Currency trading is also called Forex or foreign exchange. Here, you can purchase and sell currencies to gain profits based on the foreign exchange rates.
Your decision to buy or sell a particular currency will be based on the direction you think the currency will move.
Benefits
- Highly accessible market for all types of traders
- Flexible trading market available 24×7
- Highly liquid financial market aiding traders
5. ETF
Exchange-Traded Funds are a collection of investments you can purchase and sell on the stock market. In addition, you can select an ETF that is tracking a broad market index.
Here, the fund manager will make investment decisions according to the market index.
Benefits of Investing in ETFs are:
- Excellent portfolio diversification allows better trading opportunities.
- Lower operational costs.
- It provides intraday trading and liquidity.
6. Mutual Funds
Mutual Funds allow you to buy a group of investments together in a particular transaction. You can consider it a pool of money where multiple investors contribute. Moreover, a fund manager invests the money in assets, bonds, or stocks.
When the fund’s value rises, you can sell it to obtain a profit.
Benefits of investing in mutual funds are follows:
- Offers flexibility to invest small amounts
- Complete assistance by a fund manager
- Save tax by investing in ELSS Mutual Funds
- Excellent fund accessibility and liquidity
7. Bonds
A government or private organization can issue a bond. When you purchase it, the bond acts as a loan you make to the firm or government department. However, it is a fixed-income investment, so you will receive interest payments.
After a specific period, you’ll get back the principal amount you paid for purchasing the bond.
Benefits of Bond Investment
- Stable returns with low risks
- Preserves capital during market crashes
- Ideal option to reduce tax burdens
8. Digital Gold
By now, you must have understood the basics of commodities, derivatives, currencies, and other financial instruments. But to understand how to invest in share market, you need to learn how to buy/sell stocks and open a trading account.
You also need to know how to diversify your portfolio to gain better financial stability. This section will discuss how to invest in stocks and other relevant details.
You must open a Demat account to hold your securities and shares in electronic formats. These accounts will convert the share certificates from physical to electronic format to provide you with greater accessibility.
If you’re inexperienced about all this, you can use a stockbroker company’s help to open a Demat account.
Here are the documents required for Demat account opening –
- Identity proof such as your passport, Aadhar card, PAN card, driver’s license, voter ID, or any other photo ID
- Address proof such as PAN card, Aadhar card, passport, or electricity bills
- Your passport-sized photograph
- Bank account proof searches an account statement or a passbook
After your submitted documents are verified, your account will be created successfully. Moreover, the authorities will also create a trading account along with the Demat account. The previously submitted documents will suffice in this case.
To start investing properly, ensure that your Demat and trading account is properly linked. In addition, you need to be aware of all the associated account opening charges for no surprises later on! But don’t worry, at Choice, you won’t be charged any Demat account opening charges, and your first year AMC charges will be waived.
1. How to Select Stocks for Investing
To gain excellent returns on your investment, you need to select the right stocks. That’s why you must perform a fundamental analysis of the various stock options and the market. Start following the latest updates on the financial market and read well-researched opinions by experts.
Then you have to focus on your preferred stock or share. Understand how much you can invest and the amount of risk you can handle. Then, learn about aspects like the PE ratio of the stock and its profit growth opportunities in the sector.
Here are some tips to follow –
- List down the prospective companies that have profit potential and great company management
- Select companies by the industry and your risk tolerance level
- Choose shares that match your financial objectives
- Keep an eye out for the latest trends that might affect the price of a share
2. How to Buy and Sell Stocks
To start earning money from the share market, you have to learn how to buy stocks. The first step is opening a Demat account, which you have already learned.
So, the next step in buying stocks is to select an online broker and open an account on their website. The process is like opening a bank account and takes a few minutes.
These investment platforms are registered by the government departments like SEBI for your safety. However, these platforms will charge a brokerage fee for offering their services.
After paying the fee and selecting a stock, you have to place an order. Subsequently, the broker will send the purchase order to the associated stock exchange. After the transaction is over, the broker will send the stock units to your Demat account.
Wondering how to sell stocks? Here are some pointers –
- Consult your broker for advice on selling.
- Select the market order if you want to sell the stock at the best price available.
- Select the stop order if you plan to sell the stock if it goes below a specific price point.
3. Create Your Diversified Portfolio
A diversified investment portfolio is when you have participated in multiple investments. When you invest in multiple sectors, you automatically reduce your risk of financial losses.
So, you can diversify your portfolio by owning stocks in several domains like IT, pharma, metal, steel, automobiles, banks, and financial institutions. Your portfolio must consist of a combination of different types of investments like bonds, ETFs, and commodities.
Moreover, you must include stocks from multiple countries, risk profiles, and market caps. Besides providing your financial stability, diversification will also help you explore multiple investment options.
It’s also important to remember that portfolio diversification is not a one-time thing. So, you must check your investment portfolio regularly and make modifications if the investments don’t match your financial goals.
4. Analysis of Your Portfolio
Portfolio analysis is vital to understand if your investments are moving in the right direction. After all, the ultimate aim is to improve your income and generate profits. So, you need to analyze your portfolio to see if your investment decisions meet your needs and desired ROI.
You can start by looking into your investment horizon and how it affects your investments –
- If you have a long-term portfolio, make sure you’re planning to invest in a mutual fund or ETF for 5 years or more.
- You might gain a reasonable amount of profit this way. However, it must not hamper your existing finances.
- Similarly, for a short-term portfolio, ensure the investments consist of liquid assets. Large cap mutual funds can be a good option here.
You also have to focus on the portfolio’s performance as a whole. Moreover, you need to analyze each component’s growth rate and possible ROI.
In Conclusion
You might have understood the fundamental concepts of how to invest in share market. But, try not to rush with your investments. Always invest in stocks according to your risk-taking appetite and financial targets.
Even if a share seems lucrative, never risk all your money on it, especially when you’re starting.
A good option is to create an emergency fund in case the market crashes, and you suffer a financial loss. It will also be useful in other cash crunch situations.
Moreover, when selecting an online stock broker, do your research properly. Check online reviews to be sure about a brokerage service provider. Invest safely to build wealth over time!