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  • Arjun Patil

How to invest in the stock market? Guide for Beginners.

According to Paytm DRHP, only 3% of India’s population is investing in equity markets, while the number stands at 55% & 33% for USA and UK. The inflow of capital in the markets is rising, with the rise in financial literacy and internet penetration. This October of 2022 recorded an increase of 30% (YoY) in SIPs of mutual funds. The analyst projects upward growth, with most potential future investors being young and risk-taking.

This article will go through some essential aspects of investing in stock markets. This article guides you through the why, the what, and the how of stock market investing.

Why Invest In Stock Markets?

Many relate stock market investing to gambling, which is highly wrong. Gambling is where the outcome depends on sheer luck, while investing is a science that majorly works on the principles of fundamentals and technicals of the assets. Even knowing the basics, investors could usually guarantee a higher ROI percentage than inflation. The much favored traditional instruments, like the FDs and PPFs, find it hard to stand against the rising inflation.

Why ROI needs to be higher than inflation?

Example: If you own 100rs and a YoY inflation is 7%, the value of your asset would drop to 93rs the next year. However, if your ROI on those 100rs is 10%, the value would have risen to 102.3 rs. The asset holder can break even by matching ROI with the inflation rate of 7%. So it's necessary to have a higher than-inflation ROI, which is hard to achieve through traditional investments.

Return on investment of FDs and stock markets over the period of 8 years in the past.
FD & NIFTY Returns (Annualized) vs Inflation

Source: Maitra Commodities & Macro Trends.

However, an essential aspect of consideration should be investors' risk appetite. It varies from person to person depending upon family conditions, income, responsibilities, loans, etc.; hence, the choice of investment instruments is subjective. Fixed Deposits are guaranteed returns, thus less risky than the much more volatile equity markets.

How to Invest in Stock Markets?

There are two types of markets,

1. Primary Markets

2. Secondary Markets.

Primary market:

Primary markets are the markets in which the companies offer securities to the public for the 1st time to raise funds. This process is also known as IPO (Initial Public Offering), where the trade is between the retail investors and the company.

Primary markets are the markets where the company sells securities to raise funds. Its also  known as IPO
Primary Markets

Secondary Markets:

Secondary markets are the financial markets that allow trading securities issued in the primary market. This trading is among the investors and not with the company that had earlier given the securities.

The three most essential intermediaries to conduct the transactions are

1. Stock Exchange

2. Stock Broker

3. Depositories

What Are Stock Brokers And Why We Need Them?

Stock Brokers are ground-level agents who help investors conduct buy/sell transactions of stocks via the stock exchange marketplace. The brokers are essential intermediaries for the investors, as investors can’t directly trade with the exchange.

The broker creates a Demat and a trading account for the investors, which hold the stocks and the funds, respectively, for the investors. When an investor puts in a buy/sell order, the information goes to the stock exchange for matching. It is also responsible for communicating with depositories (CDSL/NDSL) and clearing banks to manage stocks and funds. (Learn more about the depositories and the clearing banks below)

Brokers also provide additional services like research, analysis, investment advice, and access to financial instruments like mutual funds, insurance, etc. Some of the most well-known brokers in India are Zerodha, Grow, Angel one, Upstox, ICICI Direct, etc. They charge a small fee to the investors for providing all these services.

What Are Stock Exchanges and Why We Need Them?

Stock Exchanges are an integral part of trading stock as they

1. Act as a marketplace and a central location for trading stocks

2. Guarantee trade between 2 investors and ensures fair trade.

India has two exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The purpose of the stock exchange is to match buy and sell orders coming from the broker accounts of the investors, inform the depository for managing the transfer of stocks, and inform the clearing banks to manage the transfer of funds.

What Are Depositories?

Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) are the two depositories in the Indian stock markets. It's responsible for managing the transfer of stocks between two investor Demat accounts and holds the record of ownership of stocks.

What Are Clearing Banks?

Clearing banks are the banks associated with brokers. They assist in the transfer of funds after buy/sell transactions from the investors trading account. Examples of clearing banks are Axis Bank, ICICI bank, etc.

All the entities mentioned above come under the regulation of SEBI (Securities and Exchange Board of India), which oversees the market to avoid any malpractices.

How does the stock market works. transfer of stocks between 2 brokers with stock exchange, depositories and clearing banks
Working of stock market

How To Start Investing In Stock Markets?

Some essential steps to follow for investing in stock markets are

1. Open Demat & Trading Account:

As mentioned above, SEBI-registered Stock Brokers are vital for any stock trade. Investors can easily create an account with the broker online. Some essential documents for creating an account are.

  1. Self-Attested copy of the PAN card

  2. Aadhar card

  3. The mobile number linked with the Aadhar

  4. Proof of a bank account with the investors name (canceled cheques, bank statements, passbook front page, etc.)

  5. A scanned copy of the signature.

It generally takes 2-3 days to create the account.One of the criteria that investors should consider while choosing a brokerage firm is the fees charged by the brokerages.

With the account set-up, investors can place the buy orders instantly, and the funds will get deducted from the trading account.

The investors will have to add funds from their linked bank accounts to the trading account by payment modes like UPI, Debit cards, NEFT, etc.

2. Investing Philosophy:

Depending upon the investor's risk appetite, the investor can choose to invest in low-risk, medium-risk, or high-r isk stocks. It is recommended that investors go through a thorough understanding of the company before investing in any share. Studying the fundamentals, conducting technical analysis, and analyzing the world market conditions can help narrow investment decisions.

However, if an investor isn’t willing to learn and conduct the analysis, the investors can choose passive investment instruments and trust legit mutual funds, SEBI registered advisors, experts, etc.

Investors should also check out our Investmint app, where SEBI-registered research analysts suggest historically proven investing models. These models work according to rules based on maths and science, taking all the emotional aspects out of the trading.

3. Learn the Skill:

Investors should consider learning technical skills and basic trading vocabulary. It will help you navigate the platform and use the tools to the best of their capabilities.

Investors can learn greater insights about stocks, bonds, mutual funds, and other securities by using analytical websites like Tickertape, which can help make better investments.

4. Diversify The Portfolio:

It's always a good idea to diversify the portfolio of assets according to the industries. This reduces risks and can help to protect your portfolio from the effects of poor performance of a single industry.

5. Keep on Learning:

Besides what we covered above, there are many more things to learn about stock market investing. Some of these are

A. Taxation on investments

B. Mutual funds and their types

C. Understanding the effect of SIPs on investment

D. Understanding various trading models best suiting your investment plans etc.

The markets are evolving, and investors must update themselves with the latest news and trading knowledge. We at Investmint are determined to provide easy-to-understand guides for beginners and experts in stock market investing. So do subscribe to our newsletter to be updated with the latest article. Also, do follow our socials to keep up with our product updates.

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