How to invest in the share market: A beginner’s guide

We work hard to earn a living and work even harder to save from our earnings. Savings and investments are two sides of the same coin, yet they are different. Essentially, the money lying idle in your bank account needs to be invested. And your investments need to earn a return that beats inflation for them to grow over time. Investing is the way to make your savings work for you. If you are new to investing and need some hand-holding, here is a step-by-step guide on how to invest in the share market. 

Understanding the basics

Getting a grip on the basics will help you understand investment products and make informed investment decisions.  

Stocks and shares defined

Stocks, shares, or equity denote ownership in a firm. Buying shares of a company grants the buyer part-ownership in the firm. The ownership is limited to the proportion of shares held by the individual. 

Stocks do not guarantee regular income. However, as part owners of the organization, stock owners may get dividends and see capital appreciation with the increase in the value of equity shares. 

Different types of stocks

• Common Equity

Common stock is the most widely issued class of equity shares. Common stock indicates ownership in the company and represents the rights of shareholders over the firm’s assets in case of liquidation or bankruptcy. 

• Preferred Equity

Preferred equity comes with different sets of rights over common stock. While it also denotes ownership, preferred equity has greater rights over the company’s assets in case of dividends, liquidation, or bankruptcy. 

• Private Equity

Private equity refers to investment in firms not publicly traded or listed on a stock exchange. 

• Public Equity

Initial Public Offering, or IPO is how a company offers its shares to the general public, representing a transition from private equity to public equity.

How does the stock market work? 

Before we discuss how to invest in the share market, we need to understand what stock markets are. 

The stock market is a platform where all the publicly listed shares will be traded. Investors can buy and sell shares on the stock market. BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are the leading Indian stock exchanges. 

Assessing your financial situation

You need to make your savings work to create wealth over time. Creating wealth is great, but setting your financial goals and tailoring your investment decisions to achieve those is the key.

Setting financial goals

This is the first step. Keep the big picture in mind. Think of what you want to achieve and set timelines for your financial goals. The goals can include buying a car in the next two years or purchasing a house after 10 years.

It is advisable to set SMART financial goals. SMART stands for:

• Specific
• Measurable
• Achievable
• Relevant
• Time-bound

Setting goals with specific objectives will make investment planning easy. 

Determining risk tolerance

Once your goals are set, the next step is the assessment of risk tolerance. An individual’s risk-taking ability depends on various factors such as the number of dependents, income level, and debt.

As an individual looking to start your stock market investment journey, you must assess your risk profile and select stocks that match your risk profile. 

A person with a low-risk appetite might prefer investing in established companies with a steady growth rate. In contrast, someone with higher risk tolerance might prefer investing in small-cap or mid-cap stocks with high growth potential, but riskier than large-cap stocks. 

Researching and selecting stocks

You have an idea about what the stock market is. You have set your financial goals and have determined your risk profile. The next step in your ‘how to invest in the share market’ journey is research-based stock selection. 

Equity research comes in two modes: fundamental analysis and technical analysis. Let’s discuss each in detail. 

Fundamental analysis

Fundamental analysis is the method of estimating the intrinsic or fair value of a stock. Fundamental analysis takes into account data such as:

• The state of the economy 
• The state of the industry in which the stock-issuing entity operates 
• The financial performance of the stock-issuing entity 

Financial analysts will use publicly available financial information from sources such as the company’s annual reports to calculate the fair value of the company’s stock. 

A newbie investor might not be able to value a stock using fundamental analysis, but one can parse the already available data from trusted sources and interpret it. Analyzing data, growth rate, industry competitiveness, and the company’s financial strength will help you make an informed investment decision. 

Technical analysis

Technical analysis refers to analyzing and estimating stock price movements based on past market data, mostly price and trade volume. 

Technical analysis will study the following indicators:

• Price patterns
• Chart analysis such as candlestick charts 
• Volume and momentum analysis
• Moving averages 
• Share price support and resistance levels
• Oscillators 

These indicators help predict share price movement for the short-, medium-, and long-term. You can analyze stock price movement and trading volumes to make buy-and-sell decisions. 

Creating a diversified portfolio

We have all heard about building a well-diversified, balanced portfolio. Let’s understand why diversification is important.  

Building a balanced portfolio

Once you have set your financial goals and assessed your risk-taking ability, the next step is to build a portfolio. It is called a portfolio because it contains a bunch of assets and not just one asset or a single asset class like shares or debt instruments. 

An investment portfolio will have several assets such as stocks, bonds, commodities, and other asset classes that suit an investor’s risk profile. The proportion of assets will depend on one’s risk appetite and financial goals. 

While building a well-balanced portfolio is important, the asset weights will depend on the age, risk profile, and the investor’s lifestyle preferences. 

The importance of diversification and a balanced portfolio

‘Don’t put all your eggs in one basket,’ goes the investment thumb rule. 

A diversified portfolio is exactly that. Creating a diversified, well-balanced portfolio ensures that your savings will be invested in different assets. Optimal diversification will help you minimize risk while maximizing returns. 

While diversifying, one should avoid over-diversification as you might run the risk of diluting returns in an over-diversified portfolio. 

Getting started with an online brokerage

Getting started with online trading in India is easy. Follow the steps below to set up an online brokerage and trading account to begin your stock trading and investment journey. 

Step 1

Choose an online broker 

There are multiple online trading and investment platforms available in India. Different brokers have different USPs such as discount brokering, ease of accessibility, and easy discovery of stocks for trading and investments for new investors. You should choose an online trading platform that best suits your needs. 

Lemonn, an online stock trading platform, could be a great choice for beginners and seasoned investors. You can explore the app before deciding on the appropriate online brokerage platform. 

Step 2

Open Demat and Trading Account

The next step after selecting an online brokerage platform is to open a demat and a trading account. A demat account is an intermediary between a stock exchange and the investor.  Demat is short for dematerialized, meaning your stocks will be stored electronically. 

While the demat account will store your shares in a dematerialized format, the trading account will help you buy and sell financial instruments such as stocks, bonds, and ETFs. Investors can choose a SEBI-registered stockbroker and one that offers trading on both NSE and BSE.  

You will need the following documents to open a trading and demat account:

• KYC documents such as PAN card, address proof, and identity proof such as Aadhaar Card, passport, etc. 
• The application for opening a demat and trading account can be submitted online or offline. 
• Once the documents are verified, you will receive approval for your trading and demat account.

Step 3

Login to your account and add funds

Once the account is opened, you need to log in to the account by using the login credentials provided by the broker. Next, you can add bank account details to your account to add funds to your account using payment options like UPI and net banking.  

Step 4

Research stock details and invest 

Now you have access to live stock prices, market movements, etc. Research stocks, look at price movements, read up on the company, and finally buy the stock.

Making your first investment

How to invest in the share market is a commonly asked question. Thorough research is the straight answer. 

A company’s stock price is based on macro factors such as economic growth and industry environment and company-specific factors such as financial stability, debt levels, market share, etc. This is known as a top-down approach to fundamental analysis. 

You can use a judicious mix of fundamental analysis and technical analysis to support your buy or sell decision. 

Once you have identified stocks that could help you grow your savings, you can start with a mock portfolio to test your assumptions before investing your hard-earned money. 

Monitoring and adjusting your portfolio

Investments are dynamic and need to change with time. That is why your carefully structured portfolio needs timely monitoring and readjustment. The readjustment is required for two reasons: Your asset allocation is upset because of a stock gaining or losing considerable value. The second scenario is when your financial goals have changed and your portfolio needs to be rebalanced to reflect the change. 

Financial advisors recommend revaluation and rebalancing of portfolios at regular intervals. The time frame can be every 6 to 12 months or when there is a change in your financial situation. 

Please note that the rules aren’t set in stone. You should carefully consider your risk tolerance when allocating your assets. 

Dealing with market volatility

When investing in stocks, volatility is a constant. Markets will go up or down, triggered by news and other significant developments. The best way to deal with market volatility is to exercise caution when markets are choppy and refrain from making decisions in uncertain market conditions. 

Conclusion

Stocks are a good asset class to consider while building your investment portfolio as they typically give a higher rate of return than traditional asset classes such as fixed deposits and corporate debt. If you are wondering how to invest in the share market, this blog post can serve as a starting point.

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