What is Share Market?

The Stock market is a dynamic platform where buyers and sellers converge to trade publicly listed financial instruments during specific trading hours. Often, the terms ‘share market’ and ‘stock market’ are used interchangeably. However, it’s crucial to note that the key distinction between the two lies in the range of tradable assets. While the former exclusively deals with shares, the latter encompasses a broader spectrum of financial securities, including bonds, derivatives, and forex, among others.

The two major stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE)in India. Let’s understand how to invest in share market, a step-by-step guide.

Step-by-Step Guide to Start Investing

Here’s a comprehensive step-by-step guide on how to invest in share market for beginners.

Determine your investing approach

The first step when considering how to invest in stock market is to determine your preferred approach. Investors often fall into various categories, depending on their preferences and circumstances.

Let’s identify which statement best aligns with your situation:

* I enjoy analyzing data and conducting research.
* I prefer to avoid extensive mathematical analysis.
* I can dedicate several hours per week to stock market investing.
* I like learning about companies but don’t want to dive into the numbers.
* I’m a busy professional with limited time for in-depth stock analysis.

The encouraging aspect is that, regardless of your choice, you can still become a successful stock market investor. The only thing that varies is the approach you’ll take.

The different ways to invest in the stock market

Individual stocks

Investing in individual stocks is a viable option, but it requires a commitment to continuous research and evaluation. If you have the time and inclination for this, we wholeheartedly encourage it. A diligent and patient investor can indeed outperform the market over time. On the flip side, if tasks like analyzing quarterly earnings reports and engaging in moderate mathematical calculations don’t pique your interest, there’s nothing wrong with adopting a more passive Investment approach.

Index funds

Apart from buying individual stocks, another option is to invest in index funds, which mirror stock indices such as the S&P 500. When it comes to choosing between actively and passively managed funds, we generally favour the latter, with some exceptions. Index funds typically offer several advantages, including substantially lower costs and a virtual assurance of matching the long-term performance of the underlying indexes. Over time, the S&P 500, for instance, has generated total annualized returns of about 10%, and this kind of consistent performance has the potential to accumulate substantial wealth over time.

Robo-advisors

In recent years, the popularity of robo-advisors has soared. These are online brokerages that automate your investment process. They invest your money in a portfolio of index funds tailored to your age, risk tolerance, and investment objectives. Robo-advisors not only handle your investment selection but also often optimize tax efficiency and automatically adjust your portfolio over time.

Decide how much you will invest in stocks

First and foremost, let’s discuss the money that should not be directed towards share market investment. The share market investment is an inappropriate place for funds that you might require within the next five years, at the very least.

Over the long term, the share market investment is expected to rise, but in the short term, stock prices can exhibit a considerable degree of uncertainty. Experiencing a 20% drawdown in any given year is not uncommon, and there are occasional drops of 40% or even more. Stock market volatility is a typical occurrence that should be anticipated.

Recent instances serve as illustrative examples. During the 2007-09 bear market triggered by the financial crisis, the S&P 500 plummeted by more than 50% from its previous highs. In 2020, amidst the initial phases of the COVID-19 pandemic, the market experienced a decline of over 40%.

Therefore, it’s advisable not to invest the following funds:

1. Your emergency fund
2. Money designated for your child’s upcoming tuition payment
3. Savings allocated for next year’s vacation
4. Funds set aside for a down payment, even if you won’t be ready to purchase a home for several years.

Asset allocation

Let’s delve into the strategies for managing your investable funds, which are the funds you anticipate not needing for at least the next five years. This approach is commonly referred to as asset allocation and involves several key factors. Your age holds significant importance, as do your individual risk tolerance and investment objectives.

Age is a crucial factor to consider. As you grow older, the suitability of stocks as a long-term investment gradually diminishes. When you’re young, you have the advantage of time to weather market fluctuations, but this changes in retirement when you rely on your investments for income.

A helpful guideline is to subtract your age from 110. The result represents the approximate percentage of your investable funds that should be allocated to stocks, which includes mutual funds and ETFs with a stock focus. The remainder should be directed towards fixed-income investments such as bonds or high-yield certificates of deposit. It’s important to note that you can fine-tune this ratio based on your personal risk tolerance.

Take a 40-year-old individual as an example. According to this guideline, it implies that 70% of their investable funds should be invested in stocks, while the remaining 30% should be allocated to fixed-income options. Should you have a higher risk appetite or anticipate working beyond the usual retirement age, you might consider adjusting this proportion to favor stocks. Conversely, if you prefer a more stable portfolio and wish to avoid significant fluctuations, you can consider shifting the balance in the opposite direction.

Open an investment account

Having advice on stock investing for beginners is valuable, but it’s essential to know how to put that advice into action. To buy stocks, you’ll require a specialized account known as a brokerage account.

These accounts are available through companies like E*Trade, Charles Schwab, and various others. The process of opening a brokerage account is typically swift and straightforward, often taking just a few minutes. You can easily fund your brokerage account through methods such as electronic funds transfer, check deposits, or wire transfers.

While opening a brokerage account is generally uncomplicated, it’s wise to consider a few factors before selecting a specific broker:

Type of account

First, the initial step is to determine the appropriate brokerage account based on your financial goals. For individuals who are new to stock market investing, the choice typically lies between a standard brokerage account and an individual retirement account (IRA).

Both account types permit the purchase of stocks, mutual funds, and ETFs. The primary factors to consider revolve around the purpose of your stock investments and the level of ease you desire for accessing your funds.

If you seek quick and unrestricted access to your funds, are investing for short-term needs, or plan to invest more than the annual IRA contribution limit, a standard brokerage account is likely the right choice.

Conversely, if your objective is to create a retirement fund, an IRA is an excellent option. IRAs are available in two main categories: traditional and Roth IRAs. Additionally, there are specialized IRAs for self-employed individuals and small business owners, such as the SEP-IRA and SIMPLE IRA. IRAs offer significant tax advantages for stock investments, but they come with the drawback of limited access to your funds until you reach a certain age.

Documents Required for Opening Demat Account

To initiate your journey into share market investment, you will be required to provide the following documentation:

1. PAN Card
2. Aadhaar Card
3. A cancelled check from your active bank account with essential details, including the IFSC Code, account number, account holder’s name, and signature.
4. Supporting documents demonstrating a consistent source of income.
5. A proof of residence, which should align with the approved document list of your broker, depository participant, or bank.
6. Passport-sized photographs of the applicant.

Compare costs and features

The majority of online stockbrokers have done away with trading commissions for online stock transactions, putting them on a nearly equal footing in terms of costs, except for options and cryptocurrency trading, which still involve fees with most brokers offering these services.

Nevertheless, there exist significant distinctions among brokers. Some provide customers with a range of educational resources and access to investment research, catering to the needs of novice investors. Certain brokers allow trading on foreign stock exchanges, while others boast physical branch networks for those seeking in-person investment guidance.

Furthermore, the user-friendliness and functionality of a broker’s trading platform vary considerably. Having personally experienced several of these platforms, I can attest that some are more cumbersome than others. Many brokers offer the option to try a demo version before making any financial commitments, a step I highly recommend taking.

Choose your stocks

Now that we’ve covered the process of purchasing stocks, if you’re seeking beginner-friendly investment suggestions, here are five excellent stocks to kickstart your journey.

Certainly, within a few paragraphs, we can’t delve into all the factors to consider when selecting and assessing stocks. However, here are the key principles to grasp on how to invest money in share market

1. Diversify your portfolio: It’s essential to spread your investments across various companies and sectors.
2. Invest in businesses you understand: Stick to companies whose operations and industries you comprehend.
3. Avoid highly volatile stocks initially: Steer clear of stocks with erratic price swings until you gain more investing experience.
4. Stay away from penny stocks: These are often risky and speculative investments.
5. Learn fundamental metrics and concepts for stock evaluation: Familiarize yourself with key indicators for assessing stocks.

Diversification is a smart strategy, meaning you should have a mix of different types of companies in your portfolio. Nevertheless, don’t overdo it. Concentrate on businesses within your expertise. If you find that you excel at evaluating a particular type of stock, it’s acceptable to have a substantial portion of your portfolio dedicated to that industry.

While high-growth stocks may seem enticing for wealth-building, it’s advisable to wait until you have more experience. Start by establishing a solid foundation for your portfolio with well-established businesses, mutual funds, or ETFs.

If you opt to invest in individual stocks, take the time to understand the fundamental methods for assessing them. Our value investing guide is an excellent starting point for identifying attractively priced stocks.

Continue investing

Here’s a valuable investing insight from the legendary Warren Buffett, often referred to as the Oracle of Omaha: You don’t have to undertake extraordinary actions to achieve extraordinary results. (Please note that Warren Buffett is not only the most successful long-term investor in history but also an exceptional source of wisdom for your investment strategy.)

The most reliable method to generate profits in the stock market is to acquire shares of exceptional businesses at reasonable prices and retain these shares for as long as those businesses continue to excel, or until you require the capital. By adhering to this approach, you may encounter some fluctuations along the way. However, over time, it’s likely to yield outstanding investment returns.

Things to Consider Before Starting Investing in Share Market

While share market investment may not be as daunting as it initially appears, it’s important to acknowledge that one can become engrossed in the trading world without reaping long-term rewards. To safeguard against such a scenario, consider the following points before diving into investments:

Learn Basics of Share Market (Introduce our course)

Learn basics about how to invest in the share market with the value investing course from EduBridge wherein you will learn about general financial market concepts, primary and secondary markets, and various investment products, and gain confidence in the basics of investment, including well-known methods like Value and Growth Investing while also understanding stock market principles and terminology, preparing you for the next stage in this domain.

Diversify your Portfolio

A well-rounded portfolio is a robust one. When a single asset class dominates your investments, it can leave you vulnerable during downturns in that specific category. To mitigate the impact of underperforming asset classes, financial experts advise incorporating alternative assets. For instance, if your portfolio is heavily weighted in equities, it’s prudent to include investments in bonds or other debt instruments. This diversification within your portfolio serves as a safeguard, helping protect your investments during turbulent market periods.

Understand the Investor Profile

Your investor profile provides insights into the types of investments that align with your risk tolerance, enabling you to tailor your portfolio to a level of risk that complements your financial goals and lifestyle.

Create an Investment Plan

Having an investment plan that outlines your desired earnings from your investments and the expected duration you’ll need to stay invested to achieve those goals can help you steer clear of potential pitfalls in the future.

Conclusion

In conclusion, investing in the stock market offers great potential for wealth growth, but it requires knowledge, diversification, and a long-term approach. By staying informed, spreading risk, and maintaining patience, investors can navigate the market successfully and work toward their financial goals.