This is becoming a very common question now – ‘how to invest in stocks?’ or ‘how to invest in the share market?’
This is mainly because of the increasing ease in investing. Needless to say, the much-improved internet penetration in India has also helped no doubt.
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In this article
Step by step guide: how to buy stocks in India?
Step 1: Stock broker
Before you move ahead, you need to choose a stock broker.
A stock broker is a medium via which you will place buy and sell orders on the exchange.
Don’t know what an exchange is? Don’t worry, I have explained that further in this article. Just know that you need a stock broker to buy and sell shares.
Step 2: How to open demat account in India
Now, I am sure you know you need to open a demat account.
There are 3 parts to this. To invest in stocks, you will need:
- A bank account: this will be used to store money. When you want to invest, you can transfer this money from your bank account to your trading account.
- Demat account: When you purchase any stock, this is where it is digitally stored.
- Trading account: This account is what you use to buy and sell shares. Not just shares, you can also invest in mutual funds, gold, options, IPOs, etc. via a trading account.
Usually, when you go to a stock broker, they will open a demat and trading account for you and link your bank account with it.
Many banks offer a 3-in-1 account where you can open a bank account, demat account, and a trading account together. This is a much more convenient way as all accounts are under the same company. It is a more seamless experience.
Step 3: Demat account opening documents
There are some mandatory documents needed to start investing in the share markets. Here is the complete list of documents needed for a demat account:
- PAN card (more: how to apply for PAN card)
- Aadhaar card
- Address Proof (Aadhaar card, Voter id card, Driving Licence, Bank Statement, Passport, Rent Agreement, Utility Bill, Government ID with address proof, etc).
- Canceled cheque with the name mentioned
- Income proof
Fill the account opening form with the above proofs and submit it to the stock broker of your choice.
Step 4: Start Investing!
In about 14 days, your account will be active.
Now you can invest in any stock of your choice.
You can even invest in IPOs, options, futures, gold, mutual funds, etc.
Caution: This is just how you can open an account to start investing. Choosing the right investment option is another game altogether.
If you want to learn how to choose the right investment options, read further.
This is a detailed article about how you can make the right investment choices to become super wealthy!
Stocks to buy
Stock markets can give you massive returns.
Massive. Very massive.
Good investors make between 15 and 20% per annum.
Compare that to what you get from FD – 6-8% per annum.
Is there any risk?
Yes, of course, there is a risk. But, over a long period of time, taking this risk has proven to be very fruitful for stock markets investors.
Have a look at the graph below.
Assuming FD gives you 8% pa (blue line) and stocks give you 20% pa (green line), here’s how much more you can make.
If you started with ₹1 lakh, in 15 years, FD will give you around ₹3,17,000. And shares will give you around ₹15,40,000.
This is not to say that you will get 20% from stocks. That depends on how good your investments are.
What I am trying to say is that there are people who made such returns and if you work on it and have the appetite for risk, you can too.
How to invest in the share market?
In this article, I will try to cover stock market basics – things you need to get started.
This is by no means everything you need to know. But it is what you definitely should know before moving ahead.
Investing in stocks
Let’s break this into parts. It’ll be easier to understand that way.
1. How to buy stock
There are broadly two ways you can buy shares of companies.
You can buy the stocks of companies you think are good investments on exchanges. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are two examples of stock exchanges.
Imagine a shoe shop. You can buy a pair of Nike shoes from various shops. The brand remains the same.
Likewise, an exchange is just like a shop where you can buy and sell stocks.
To buy shares, you will need a demat account with a stock broker. There are many stock brokers you can choose from.
A stock broker places orders for buying and selling on your behalf in the exchange.
These details do not matter much. All you need to know is that via these brokers, you can buy stocks online.
The other way to invest in stocks is via mutual funds.
Mutual funds come in many types and categories.
Mutual funds that invest in shares are called equity mutual funds.
They are excellent for people new to the stock markets.
In mutual funds, you basically outsource your stock investments to an expert. The expert is called a fund manager.
He will manage your money and ensure you get good returns. This is in exchange for a small fee called the expense ratio.
You do not even need a demat account for investing in mutual funds.
You can sign up on Groww (Android app, iOS app, and website) in minutes and start investing.
Learn everything you want to learn about mutual funds here: Beginner’s Guide to Mutual Funds.
2. Stocks to buy
If you are reading further, then it seems mutual funds don’t interest you as much. Okay, I can understand that.
Now comes the question of which stocks to buy.
This is never an easy answer. In fact, there really is no correct way to answer this question.
But what you can do is learn about the types of stocks first.
Let’s delve into this.
Types of stocks (based on company size)
- Large-cap stocks – these are companies that are very large in size – the 100 biggest companies of India. To name a few, HDFC Bank, Maruti Suzuki, Titan, Bajaj Finserv, and so on. Such companies are known to be relatively more stable. They do not offer very high growth but they are lower risk.
- Mid-cap stocks – these are companies that are between 100 and 250 of the largest companies in the market. To give you a few examples, City Union, Emami, Cummins India, Exide Industries, etc. Such companies are considered riskier than large-cap funds. But they also offer a higher growth.
- Small-cap stocks – these companies are all the companies that are not the 250 largest companies of India. These are usually such small companies that chances are you might not have heard of them. Some examples: Sharda Cropchem, Vindhya Telelinks, West Coast Paper Mills, and many more. The risk in the case of small-cap stocks is very high. But, the possible returns are also correspondingly very high.
Types of stocks (based on sector)
When I say sector based stocks, I mean industry.
Stocks belong to different industries.
Stocks belonging to different industries behave differently.
There are many sectors or industries. I will try to cover a few here as covering all is not possible.
- Financial services sector: Examples of stocks in this sector – HDFC Bank, ICICI Bank, SBI, Bajaj Finserv, Yes Bank, PNB, etc. This sector has shown massive growth over the last few years. Although more recently, it has been suffering due to the NPA mess that is affecting India. Finance sector stocks are by far the highest by market size. If you see the holdings of most equity mutual fund, you will observe that they hold a majority in finance sector stocks.
- Consumer goods sector: This sector involves companies that make consumer goods. Companies like Nestle India, ITC, Avenue Supermarts, etc fall under this sector. In the last major market fall of 2008, the stocks that were the least affected were consumer goods stocks. This is because while other spendings reduce, people continue buying basic consumer goods.
- Automobile sector: This sector would comprise of all companies that are involved with the automobile and its ancillaries. Not only would car and commercial vehicle companies be a part of this, but tire companies, plastics companies, glass companies, battery companies, etc, would all be a part of this sector. To name a few, Tata Motors, Amaraja Batteries, MRF Tyres, Motherson Sumi, and many more.
- Several other sectors: There are many more sectors – Pharma sector, Infrastructure sector, IT sector, Energy sector, Telecom sector, and so on. Each of these sectors has their own idiosyncrasies. They are affected by different factors differently. Some may depend on exchange rates, some on national policies, some on local demand, and a combination of these and many other factors.
Best investing books
As I have mentioned before, you cannot just enter the stock markets and start investing. Learning is of utmost importance. You must educate yourself as much as possible. In fact, to be honest, you will continuously have to keep learning and updating yourself.
Though the list of books to read is never-ending, below are some stock market books that you should definitely read:
- The Dhandho Investor ~ Mohnish Pabrai: Fundamental of investing explained in simple language. Dhandho investing framework is common business sense.
- One Up On Wall Street ~ Peter Lynch: A small investor has a big advantage over professional money managers. Peter Lynch explains how this advantage can be exploited by a common investor.
- Essays of Warren Buffett ~ Lawrence A. Cunningham: Since the last 50 years, Warren Buffett has been writing annual letters to his company’s shareholders. These writings have the best-investing wisdom explained in simple language.
Besides books, I suggest you subscribe to our YouTube channel too.
We regularly upload videos on mutual fund and stock market investing. It is a very good resource to educate yourself about the share markets. Subscribe to Groww YouTube Channel.
Now comes the glamorous bit!
Start investing in stocks!
Here’s the thing. You will never feel fully confident about your skills. If you feel very sure about your skills, let me tell you, you are being overconfident.
Learning by doing is the best way to learn.
Having said that, do not start investing large chunks of your hard earned money. That is very risky.
What you should do is start investing a very small amount – an amount you won’t be afraid to lose. Imagine you are going to lose this money for sure.
Most great investors claim you do not learn to invest till you lose money in the markets.
Just make sure you lose something you can tolerate.
This doesn’t mean you make intentional mistakes. That would be plain stupidity.
Try to avoid obvious mistakes. And let the less obvious mistakes teach you strong lessons.
Here are some extremely common mistakes new investors tend to make while investing in the share markets.
In fact, you’d be surprised by how many seasoned investors also make these mistakes.
Share market tips
Avoid the below very obvious mistakes:
- Don’t’ follow the crowd: Which stock is best to invest in? This is such a common question on the internet. You’ll get a generic answer to this. Never do this. Always pick stocks that you have researched and understood yourself. Stocks that others recommend may suit their needs, not yours. Moreover, they might not even know what they’re talking about. And even more importantly, stay away from stocks recommended by newspapers and news channels. Do your own research. Always.
- Invest in what you understand: Again, never invest in something you do not understand. If there is an industry you do not understand or know the working of, you should stay away from the stocks of the same. Investing without understanding is not investing. It is betting.
- Don’t try to time the market: there is a reason why they say equity investments should only be for the long term. In the short term, nobody knows what will happen. In the long term, they have performed well. You might think the market is at an all-time high. So it’ll go down. Maybe. But what if it continues to rise up? Conversely, if the markets are down, don’t start investing more. What if the markets continue to fall further? Invest regularly and don’t try to time the market. Some of the biggest and smartest investors have tried it and have failed.
- Be disciplined: investing in stocks needs great discipline. You cannot be quick to react, quick to panic, quick to get excited and still be a successful investor. You need to be calm, and research. Don’t rely on what others have to say about a certain stock or how an event influences a stock price. The markets are governed by two emotions – fear and greed. And these wreak havoc for most investors. If you are disciplined, you can win this game.
- Benchmark prices: A stock was at ₹500 2 months ago but now is at ₹400. So it is cheaper. Great time to buy because eventually, it will go back to ₹500, right? Nope. Not true at all. The stock markets are filled with examples of stocks that never recovered. Suzlon Energy Ltd was trading around ₹400 in 2008. Now, nearly 10 years later, it is around ₹5. ABG Shipyard Limited was trading at over ₹900 in 2007. More than 10 years later, these days, it is around ₹2. Yes, ₹2 per share. Scared? Don’t be scared.This is what happens when you do not research. But when you do your own research, you can hit phenomenal gains.Sonata Software. It was trading at ₹19 in 2002. Today, it is at ₹301.Page Industries. Back in 2007, it was at around ₹270. Today, it is over ₹24,000. Can you believe that return?Famous investor Basant Maheswari got in early on Page Industries. He made massive returns. That’s what good research does.You know your stock is good so you can ignore market panic.
- Ignore daily news: news channels and newspapers are running a business. And their business depends on you much you’re shocked. So they try their level best to ensure you panic. This is obviously not good for your investments, neither is it necessary in any way.It’s not that news doesn’t impact stocks. It does. All I am trying to say is that real news is very little. Most of it is just noise. If you have done your research and chosen high-quality stocks, it’ll stand the test of time. Short-term ups and downs are a part of investing. Also, if you do your research well, you will understand which news you should ignore and which you should take seriously.
- Too many stocks, too few stocks: don’t own too many stocks. They are difficult to manage and keep track of. And it is less likely that you will have expertise in such a diverse range of stocks. Research a few good stocks and make sure you know them very well. On the flip side, investing in very few stocks isn’t a great idea either. No matter how good your research, unforeseen events can and do happen. And they can destroy your money. So make sure you spread your money across a healthy number of stocks.
This sounds contradictory, I know – don’t own too many but don’t own too few either. But there’s a balance to be found here. You need to find your own balance.
- Don’t borrow to invest: Never borrow money to invest. This is a giant mistake. When you borrow, you have to pay back. And that too with interest. But your investment may or may not pay you back. If something goes wrong with your investments, you can be in very serious trouble.
- Never invest money for the short term: If you need money in the near future, you should keep it away from the stock markets. Stock markets by their nature are volatile over a short period of time. They almost certainly will keep moving up and down.
What happens if you need the money and the market is down? Not a nice situation to be in. Invest in stocks the money you know you won’t need for a few years.
4. How to invest in stocks
Now, let us discuss the different strategies employed while investing in stocks.
Very broadly speaking, there are two types of investors in the markets.
Short-term investors and long-term investors.
Very often, this is referred to as trading. What traders do is they buy and sell very fast. Often on the same day.
The world of trading appears very glamorous to people who do not trade. It seems like people can make very high returns very fast.
This is in part true. But there is another side to this coin, obviously. The other side is, it is very difficult to generate very high returns. In fact, most newcomers burn their fingers and never return.
Oddly, many long termers also burn their fingers.
Tread carefully if you wish to trade. Very carefully.
This is what is more recommended. Warren Buffet recommends this. Rakesh Jhunjhunwala too.
In this, the idea is that you choose quality companies with sound fundamentals, clean balances, and a good moat. You buy the shares and you stay invested for the long term.
Long-term investors believe that true returns are generated in the long term. Often, long-term refers to more than 5 years.
But for many investors, long-term means 10 years, 20 years, or even more than that.
Warren Buffet, Rakesh Jhunjhunwala, Peter Lynch, and other long-term investors have been known to hold their chosen stocks for decades.
As I have already mentioned earlier, this information mentioned here is very necessary for you to get started. But this is not all you need to know. There is much more than this that you should know about investing.
We will keep on adding articles and videos to help you learn more about stock market investing.
Till then, happy investing!
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.