How to start investing in the share market in India?
May 23, 2020

How to start investing in the share market in India?

Beginners can also invest in shares and create wealth if they have patience, discipline, and are ready to conduct substantial research. Our basic share market tutorial, vividly explains the rules of share trading, documents required for opening a Demat account, and FAQs that will come to your mind when you are figuring out how to invest in the share market in India.

Many of you feel like investing in shares and making some money through trading in equities. However, when the question arises, ‘how to invest in the share market in India?’ Most of us rely on stock tips from brokerage houses and guidance from TV channels. Trust me; you are not going to earn any significant returns in this way. Investment in share market requires patience, discipline, and substantial research in this domain. In this basic share market tutorial, we would like to focus on how to invest in shares, especially for beginners.

Before going into the share market details, let us have an idea about the two types of investment- trading and value investment. It will help you to learn how to invest in the stock market in India. In trading, investors focus on making frequent profits in a short time. Here the holding period is only for a few hours or a few days. In value investments, the holding times can stretch for many years. Here, investors remain immune to fluctuations in the stock price, as they believe that it will eventually recover and offer exponential growth. Investors also need to pay 15% short-term capital gains tax in trading as the holding period is always less than one year. On the contrary, you can save 10% in capital gain tax through investment. So, we can say that you can earn profit with trading, but create wealth with value-investment.

How to invest in the share market in India?

There are seven golden rules when you want to learn how to invest in shares? Let us unfold these share market information one by one.

1. Screening the Right Stocks

You can follow these tips while filtering suitable stocks and want to know how to invest money in the share market.

  • Market Cap > Rs 500 crore
  • Upward trend in Earnings Per Share(EPS) in the last 5 years
  • Profit percentage > 10%
  • Return on Equity (RoE) >20
  • Debt to Equity Ratio <1
  • Price to Book value (P/B) should be at least 1.5 times lower than peer companies
  • Current Ratio > 1

You do not need to hire a financial expert to gain these figures. Log in to platforms like Moneycontrol and EquityMaster to extract the data.

2. Selection of Companies

While learning about how to start investing in shares, focus on those companies having simple and transparent business policies. Visit company websites, check media updates, and gain feedback from fellow investors to know about stocks. Beginners can restrict their movements among businesses in their domain. It will help them to understand the company approaches and ensure they don’t lose money in the initial stage.

3. Focus on Companies with Sustainable Moat

After screening stocks for financial data and effective business models, focus on firms having a wider moat (competitive advantages over peers) as a crucial stock market tutorial for beginners. It makes it challenging for competitors to dislodge the stock and capture market share. Analyse the brand power, patents, government regulations enforcing barriers for other companies to entry to calculate the moat. In India, brands like Maruti, Lakme, Colgate, Dove, and Fevicol have a wider moat and enjoy substantial recall value among the public.

4. Analyse Debt Levels of Companies

When you started to learn how to invest in the stock market in India, you must remember that we used Debt to Equity Ratio and Current Ratio for the filtering of companies. These two factors denote how heavily a business remains dependent on borrowed capital. You must also assess how the companies are taking care of debts in the last few years. A firm reducing its long-term debt is more likely to improve their profits.

Long-term Debt Ratio = Long-term Debt / Total Assets

5. Checking Financial Ratios RoE and RoCE

Shortlist those companies having a high RoCE (Return of Capital Employed) and RoE (Return on Equity) values when you are learning how to buy shares online. RoCE denotes how effectively a business is allocating its resources and generating profit. RoE is a firm’s net income that they return to shareholders. These values offer you an insight into the company’s profitability and the likelihood of gaining returns through their shares.

6. Honest and Transparent Company Policies

If you are wondering how to invest money in the share market for beginners, focus on those companies having honest, efficient, and transparent management. You can check the track record of the business and whether it was ever involved in any fraudulent activities through media reports in popular search engines like Google. Go through the Annual Report of the company to understand their strategies and future vision. Check the number of promoters shareholding in the concern, and whether they are enhancing their stake in the business. It implies that sponsors have faith in the strategies of the company.

7. Perfect Price to Purchase Stocks

It is crucial to purchase stocks at the best values. It protects your investment and immunes your stock from debacles. In ideal cases, the perfect price for buying shares is below its intrinsic value (lower than its actual worth). In this way, the chances of generating a return are high. Let us suppose, the Intrinsic Value of a stock is Rs200, but you buy it at Rs100, then within a year, your chances of making money with this stock are high.

You can estimate the Intrinsic Value of the Stock through Benjamin Graham’s formula

V = EPS * (8.5+1*G)

Here V = Intrinsic Value of the Stock
EPS = EPS (earnings per share) for the last 12 months (one financial year)
8.5 = Assumed common P/E ratio for any stock
G = Expected Annual Growth rate (for the upcoming 7 to 10 years)

Similarly, consider the Compound Annual Growth Rate (CAGR) of the company to buy stock.

CAGR= (Ending Value/Beginning Value)(1/No. of Years) -1

How to invest in the stock market online?

If you are worrying about how to buy shares online, then at first you require a Demat account. It will help you in holding financial securities like debt and equities in the digital format. In India, National Securities Depository Limited and Central Depository Services Limited are the two agencies which oversee the functioning of Demat accounts.

List of documents required for opening a Demat account

  • Proof of Identity (POI): PAN card, Aadhaar card, Passport, Driving License, Identity card issued by Central or State Governments, or Voter identity card.
  • Proof of Address (POA): Passport, Voter identity card, Ration card, Driving License, or Utility bills (electricity, gas, or telephone)
  • Proof of Income: Income Tax Return (ITR) Acknowledgement slip, Salary slip, Net Worth Certificate certified by a Chartered Accountant, or Current bank account statement.
  • Cancelled cheque
  • 1 to 3 passport size photographs

PAN card is mandatory for opening a Demat account unless you are specifically exempted from obtaining PAN.

Frequently Asked Questions

1. How does the share market work?

At first, a company gets listed through the formation of an IPO (initial public offer) in the primary market. Then they distribute shares in the secondary market (stock exchanges). Investors can then buy and sell stock at a suitable price range.

2. How much minimum money is required to invest in shares?

There is no fixed minimum amount for investing in shares. You can even buy a single stock from the stock exchange to start with. However, there are some brokerage and statutory charges involved in the trading.

3. Can I invest Rs 100 in the share market?

Yes, you can even invest Rs 100 in the share market, provided you get a stock at that price.

4. What is Sensex and Nifty in the share market?

Sensex (Sensitive Index) and Nifty 50 (National Stock Exchange Fifty) are the stock index in India. While Sensex is the benchmark index of BSE (Bombay Stock Exchange), Nifty is the benchmark index of NSE (National Stock Exchange). You can say, these two platforms are the barometers of the Indian economy. Learn everything about BSE and NSE.

5. What is the brokerage fee in the share market?

Individuals preferring to invest in the stock market through a brokerage firm, need to pay a brokerage fee for purchases, sales, and delivery of stock, negotiation and consultation.

6. How to invest in the share market without a broker?

Yes, it is possible to invest in share markets, taking the help of companies’ direct stock plans (DSP).

7. When does the share market open?

Stock markets (NSE and BSE) remain open in India from Monday to Friday between 9:15 am to 03:30 pm.

8. Is the share market open on Saturday?

No, the stock exchange does not remain open on Saturday unless there are any special trading sessions. The market also remains closed on gazetted holidays.

9. What is an IPO in the share market?

IPO (initial public offering) comes into picture when a private company gets listed in the primary market and starts selling their shares to institutional investors. In this, a private company transforms into a publicly-traded company.

10. What is intraday in the share market?

When an investor buys and sells his stock within the same trading day, then it is known as ‘intraday’. Here, investors do not intend to remain invested in the market; they just want to earn profit in a single day.

11. What is the right time to invest in the share market?

According to experts, the best time to invest in stocks is during the Bear market (shares have a downward trend). There is a saying, that it’s easy to earn profit in the Bull market, but you can create a fortune in a Bear market. Pump in your money when the market is undergoing a major correction. There will be a high probability of earning profit.

So, this was all about your queries regarding how to invest in the share market in India. Follow these tips and start investing in stock to create wealth for the future.

12. What is the Face Value of a Share in India?

Face Value of a Share in India is the value of one share in the total paid up equity share capital of any company. For example if total paid up equity is 2000000 and no. of shares issued is 200000 then the face value of a share = 2000000/200000 =10. Shares are never issued at face value as people tend to buy more shares of reputed companies or new companies of well-known promoters. So we find that most IPOs are offered at a premium to the face value of the share. The price above the face value of the share is the premium attached to the share.

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