Investing in Stock Market is just like any other type of investment such as Fixed Deposit, Government Bonds, Real Estate and Gold. However, to differentiate investing in stock market and other financial products, here are the seven unique characteristics of stock market:
- The maturity period of investments in stocks is not pre-specified.
- There is no minimum and maximum amount to invest in stocks.
- The risk involved is quite high in comparison with other financial instruments.
- Skills required to invest in the stock market are also high compared to the skills required to invest in other financial instruments.
- The return on investment is uncertain.
- There is no assured return in the stock market.
- The types of benefits (dividend, speculation, rights issue, buy-back, profits, hedging, arbitrage, and bonus issue) in the stock market are more compared to other financial instruments.
How to start learning Stock Market from scratch ?
Do you want to learn stock market for free ?
What is Stock Market for Beginners ?
- Demat Account: Just like you have a bank account to do money transactions, you need a Demat Account to start investing in shares. And the good thing is you can open a Demat account free of cost and the best thing you don’t need to pay brokerage to buy and sell shares. Click here to open your free Demat account. What are the documents required to open a Demat Account: Simple KYC Documents such as Aadhar, PAN, Photo, and Bank Details.
- As soon as you open a Demat Account, you shall start adding stocks to your watchlist. Watchlist is nothing but the display of selected stocks which you are interested to track its live prices. But the toughest question remains is what stocks to add to your watchlist. As you are a beginner, you should add stocks of such companies that are of the highest reputation and the best brand in their segment.
- Reputed brands / Reputed Companies: Let us have a look at some of India’s top companies: Reliance Industries Ltd, Tata Consultancy Services Ltd, Infosys Ltd, ITC Ltd, HDFC Ltd, HDFC Bank Ltd, Hindustan Unilever Ltd, Bajaj Finance Ltd, ICICI Bank Ltd, Bharti Airtel, State Bank of India and Maruti Suzuki. As you observe here, there are hardly any people who are not aware of these companies. There is one thing common in all these companies i.e these companies are in existence for more than two decades with an average growth of more than 20% year on year. Let us take the example of TCS Ltd. An investor who had invested Rs.10,000/- in TCS shares in 2010, would have Rs.1,00,000/- worth shares of today, i.e 10 times his investment in 10 years. In a similar comparison with other top companies mentioned earlier would have their respective growth varying from a minimum of 5 times to 100 times in the last 10 years. This is the power of compounding in equity shares over a period of time. And we say any investment over a period of five years is a good investment horizon for the long term.
- Portfolio Diversification: As you are aware of a famous quote by the well-known investor Warren Buffet which reads as Don’t put all your eggs in one basket, you should always diversify your investments across different stocks in different sectors. Let me explain the importance of diversification I simple words: In the 2008 recession, all stocks fell down by more than 50% of their share price, however, stocks belonging to IT Sector, Pharma sector, and FMCG sector did not get impacted by 2008 recession. Meanwhile investing all your money in one or stocks is always a risky bet, because what if those two companies become like Yes Bank or Kingfisher Airlines. Both stocks fell by more than 90% within no time even though they were reputed brands in their respective industry. So, by this time you should have understood the quote “Don’t put all your eggs in one basket”. Hence diversifying your investments into different stocks belonging to different stocks is very important. This process as a whole can be termed as Portfolio Diversification. Ideally, investing in 5-7 companies for a beginner, 8-12 companies for a moderate investor, and more than 12 companies for a professional investor may be suggested. However one should always take note that the stocks invested should belong to different sectors.
- Risk Management: While I would not go in-depth with regards to risk management, I would definitely explain to you the basic aspects of risk management in the stock market. Firstly, an investor should understand that the risk of losing initial capital is high in Stock Market, even though the returns are good in the long term. This is because of the volatile nature of the stock market. So before, investing in the Stock Market, investors should keep in mind that any investment in the stock market is for the long term and not for the short term. Secondly, as there are no guaranteed returns, investors should always make sure that how much capital they should deploy in the stock market. As explained above regarding portfolio diversification, investors should also keep in mind that they should not invest all their savings in the stock market. Investors should diversify into Fixed Deposits, Bonds, Mutual Funds, Gold, and Real Estate depending on their objective of investment. One should invest only a part of his savings and not his entire savings.
To summarise and to be precise, here are a few important things before you start investing in the stock market:
1. As a beginner, make sure you do not invest more than 20% of your savings in Stock Market.
2. Don’t invest all your money in 1 or 2 stocks, always diversify your investment into at least 5 companies belonging to different sectors.
3. Initially restrict your investment to top companies or bluechip companies.
4. Ideal investment strategy: For an investor having Rs.50,000 to invest in stocks, he can invest Rs.10,000 in 1 company each in five different sectors. One can invest proportionately for ticket size of Rs.5 lakhs, 10 laks,, 1 Crore and so on. However, one should keep in mind that portfolio should not contain more than 30 stocks because of two reasons: First being too much diversification and the other being difficult