How do I start trading in Indian share market ?

Stock Market is often considered to be like ‘Pandora’s Box’ by the general public of India. We Indians know how high one can soar if he/she gets the hang of the stock market but we are also afraid of the risk factor that kind of comes along as a package deal with the stock market. Yes, there is risk involved when it comes to trading and investing in shares, but when has anyone gained anything without taking big risks? Warren Buffet, one of the most successful investors of all times, says it all- “Risk comes from not knowing what you are doing”.

India has one of the youngest populations in the whole wide world and being part of this young generation, you are bound to be curious about the intriguing world of stock market. If you have taken an interest in it, you have taken a step in the right direction. But as fellow stock market enthusiasts, we must warn you that it is a slippery ground you have stepped foot on and it is absolutely necessary to equip yourself with the required information before taking the first leap. As a beginner, the first step to being a successful investor is collecting as much knowledge as you can and then start trading.

Shares

A company is allowed to share its profits with the public and expand its business through an Initial Public Offering or IPO. Once the company becomes public, the shares of the company are listed on the stock exchange and anyone willing to become a shareholder in the company can buy the desired number of shares. The price of the shares is determined by the company itself.  By becoming a shareholder, you not only own a stake in the company but are also subject to receive dividends and bonus from time to time (depending on the company’s policy).

Stock Market

A stock market is just like a supermarket where unlike grocery or other stuff, shares of publically listed companies are bought and sold. This buying and selling of company shares is known as trading of stocks. All this trading happens in two different markets- primary and secondary. When a company sells its shares for the first time i.e. through an IPO, the investors buy the shares directly from the company in the primary market. The company seeks to offer all the available stocks in one go, so only big investors get the opportunity to buy in the primary market.

Once all the stocks are sold in the primary market, the secondary market offers the opportunity for small-time investors to buy shares in the company.  Here, one investor buys from another investor and the price can either be the existing one or can be decided by both the parties. Both these markets are regulated and maintained by Security and Exchange Board of India (SEBI).

How to take that first step?

Now that you have a figured out the basic terms used in the stock market, it is time to find out how to start investing. There are a few basic requirements that you need to fulfill in order to become a legitimate investor. The first step is collecting the required documents about which SEBI is quite strict. Here are the documents that need to be ready-

1. A Valid PAN Card

2. A Valid Identity Proof (Aadhar Card, Voter ID Card, Driving License, Passport- any of these will work)

3. A Valid Address Proof

4. Bank Statement of last six months

5. A Cancelled Cheque (for bank account verification)

6. Passport Size Photographs

The next and quite important step is to get a broker. If you haven’t understood it already, it is not possible to simply go to the stock market and start buying shares. No. You need someone on the inside, someone who is authorized to buy and sell shares. They are known as brokers. A broker can either be an individual, a company or even an online agency licensed and registered by SEBI. Once you have chosen the broker of your choice, they will ask you to submit the above documents and fill up a KYC form.

You may even choose to skip the middleman and invest directly as well. Many companies employ transfer agents that allow you to buy the shares through a direct stock purchase plan. These plans involve a minimum investment amount and set fees according to the plan. As a beginner, we would always recommend you to start investing through a broker as they are more experienced and will give you valuable advice throughout.

Opening a Trading and Demat Account

Just like you need a bank account to store your money, you need to open special accounts for stock market trading. Other than a bank account, you need a demat account as well a trading account. A demat account holds all your shares and stocks under your name in a dematerialized form (hence the name). These stocks or shares cannot be held physically hence a demat account is absolutely necessary. Once you have all your shares in your demat account, next thing you will want to do is start trading them. For this, you will need a trading account as well. If you have hired a broker, they will take care of opening both the accounts as they are a part and parcel of each other. All you need to do is make sure that the fee charged at the opening of accounts is not too high.

Nowadays, a lot of banks offer the option of opening a 3-in-one account including Savings plus Demat plus Trading accounts. If you do not want to go through a broker and enter the stock market directly, you may want to choose such an account. The trading account will itself serve as a middleman facilitating the buying and selling of stocks.

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Depository Participant

The government of India has mandated two depository entities- National Securities Depository Limited and Central Depository Services Limited. They serve as intermediaries between the depository and the investors. The Depository Participants will hold all the shares that you have bought and at the same time, release all those shares that you have sold. In short, the demat account is just another name for a depository account. If you have a broker, they will take care of all this, but if you haven’t opted for a broker it is best that you know about the DPs in India. They take care of dematerialization, rematerialization, transfer of stocks, settlement of trades etc.

Prepare Yourself

Now that you have become an investor officially, it is time to start buying and selling stocks. But are you actually ready to do it? In order to answer this question, you need to prepare yourself for what is about to come your way because as we warned you earlier, it is a slippery slope out there. There are few steps that will help you in preparing yourself for the worst (and the best!).

Here they are-

  • Make it a habit to read a Business newspaper every single day. They will keep you up to date with what’s going on in the market and market trends.
  • Use your smartphone by installing an app that keeps you updated with the market.
  • Read about the terms used in the market. There are a lot of ratios (like PBV, PE) used in the market, learn about them one by one.
  • Get your hands on a good investing book (or more if you like).
  • Choose 10 or 15 stocks of your choice (they may be blue stock chips). Keep track of their movement and make note of the pattern.

Always invest the amount that you are ready to lose. Do not make the mistake of investing all your savings at once that may turn out to be a big mistake. Start out by trading small. Slowly and gradually, you will start learning about the market’s behavior and develop your instincts.

Paper Trading

This is one of the best practices that will prepare you for the big investing game. A lot of professionals still practice it to hone their skills. This type of trading is also known as virtual stock trading and it involves investing without the real money. In simpler terms, you simulate a trading process where you practice investing on paper on the basis of hypothetical investment positions. You can observe the market without any risks involved, plan out your trading strategies accordingly and try them out without anything to lose. If your strategy fails, you can always re-plan and test it again. Paper trading will help you out a lot in understanding the market and also in building your confidence.

Buying and Selling

You have prepared yourself and studied about the stock market extensively. Now, it is time to start investing. You may ask- Which stock to buy? In order to decide which stock to invest in, you must always keep this in mind- A stock is actually a company. So, whenever you are buying a share in a company, you are becoming a part of it. If the company grows, you grow and vice versa. Do your research before buying a particular stock. Research about the growth potential of the company, its past performance, growth drivers and last but not the least, your own belief in the company.

Once you know which stock you want to buy, you need only instruct your broker about the share and the quantity of the share you are willing to purchase and most importantly, at what price. As soon the share reaches the price you wanted it at, the transaction will be done. The same goes for selling a particular stock, you need only state the quantity and price of the particular share and whenever the said price has reached, the shares will be sold automatically. If you do not have a broker, you will have to take care of all this yourself. You can buy and sell stocks from two different exchanges- Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).

Whenever you have sold or bought a security, you need to instruct your Depository Participant to debit or credit your demat account with the number of stocks you have sold or bought. This can be done with the help of delivery instruction slips that must have been given to you at the time account opening.

Keep in mind

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  • Always stay away from fraudulent brokers or companies that may claim to double your money in no time.
  • Make sure that you check whether a broker is registered with SEBI or not before registering yourself with them.
  • Trading in the stock market requires a lot of practice and patience. The trade is not learned in a single day and you may lose money at times. But if you really want to be an investor, you have to stay motivated at all times.
  • When you are buying a stock, always look for discounts before choosing the one you want to buy. You will need a keen eye for finding such discounts.
  • Do not get too caught up in the advice of your broker, build your own strategies, listen to your instincts and try to stay on the top of the game.
  • You need to maintain a disciplined and systematic approach to stock market trading. This is the only way that will keep you safe from the volatility of the market.
  • Always keep track of all your investments. The best way to do it is maintaining a trading journal that has all the details about the shares bought and sold till date. This will be very helpful when you are trying to look back at the decisions made by you.

Stock market trading can be very exciting as well as very frustrating at times. You need to give yourself the time and space to learn it. Always keep in mind- “Rome was not built in a day”. You will get your Rome someday if you are patient and talented enough!

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