Investing in the stock market is a long-term process and helps in financial management. Investing in the stock market can be intimidating, especially if you're just starting out, as it's too complex and too risky. Careful understanding will help you get started.
Two of the main reasons for investing in the stock market are the potential for higher returns on your investments and establishing financial discipline. For example, investing in stocks has provided higher returns over the past decade when compared to basic savings instruments such as term deposits. Investing regularly instills the habit of financial discipline and encourages you to save money and invest carefully.
Here is a simple guide to help you through the process of stock market investing.
What is the stock market?
Simply put, a stock market is a market where financial instruments such as stocks, bonds, and commodities are traded.
The two major stock markets in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). NSE is by far the largest, accounting for over 90% of cash transactions. There are also other commodity exchanges such as Multi Commodity Exchange (MCX) and Indian Energy Exchange (IEX) for things like power trading.
All activities and participants in the stock market, including daily transactions, traded products, and exchanges that enable trading of financial instruments, are regulated by the Securities and Exchange Board of India (SEBI).
Apart from listed companies, these exchanges also manage indices. An index is a basket of stocks that represents a theme, such as size or industry. It also provides investors with a common measure of stock market trends.
The most popular indices in India are NIFTY and SENSEX. NIFTY is a basket comprising of the top 50 stocks listed on the NSE by market capitalization. SENSEX is a similar index of 30 companies listed on BSE.
Stock market indexes are commonly used to benchmark the performance of fund managers and other stocks. For example, if a mutual fund that benchmarks NIFTY's performance returns 15% this year and NIFTY returns 20%, the fund has actually “underperformed” its benchmark. This means it would have been better to buy NIFTY 50 stocks instead of relying on the expertise of fund managers.
How to invest in the stock market in April 2024?
It cannot be bought or sold directly on the stock market. To do this, you need to go through a broker who is allowed to trade on the market, or a brokerage firm that allows you to trade using their platform. The process is simple.
Opening a trading account:
To start your investment journey, you need to open a trading account with a licensed broker or stockbroking platform. This account is where you execute buy or sell orders.
Create a demat account:
The broker or platform will simultaneously establish a demat account in your name. This demat account stores financial securities electronically.
Link to bank account:
Both trading and demat accounts are linked to your bank account, facilitating seamless fund transfer.
KYC document:
To complete the account opening process, you must submit Know Your Customer (KYC) documents. This usually involves providing a government-approved ID card such as a PAN card or Aadhar for verification.
Online KYC process:
Many brokers and intermediary platforms offer online KYC processes where you can submit your verification details digitally. This speeds up account opening, often taking only a few days.
Trade execution:
Once you have set up your account, you will be able to trade with your chosen broker or brokerage firm. Transactions can be made online through our easy-to-use portal or offline by phone.
This process allows investors to participate in buying and selling activities in the stock market through authorized channels, facilitating a transparent and regulated trading environment.
How much will it cost to invest in the stock market in 2024?
There are several types of fees you typically pay.
- Transaction costs: All brokers are paid a brokerage commission. Brokerage fees are fees charged for facilitating transactions on your behalf. With the advent of discount brokers, these costs are rapidly shrinking. Apart from intermediaries, it also collects taxes and public fees paid to the government on each transaction, such as securities transaction tax (STT), SEBI fees, and goods and services tax (GST).
- Demat fee: A broker or brokerage platform opens a demat account on your behalf but does not operate it. Demat accounts are operated by central securities depositories like NSDL and CDSL which are under the jurisdiction of the government to protect the interests of the customers. You will be expected to pay a nominal annual fee (usually collected by your broker or intermediary platform) to maintain your account. Prices range between 100 INR and 750 INR.
- tax: A certain percentage of the profits earned from investments is paid to the government as tax. Stocks are subject to a 10% long-term capital gains tax if held for more than one year, and a 15% short-term capital gains tax if held for less than one year. . Both of these tax rates change based on the amount of taxes or surcharges charged by the government.
Types of products you can buy on the stock market in 2024
The main financial instruments traded on the stock market are:
- stock: Stocks issued by a company allow you to receive profits paid by the company in the form of dividends.
- Bonds: Bonds issued by companies and governments represent loans made by investors to the issuer. These are issued for a fixed period of time and at a fixed interest rate. Therefore, they are also known as debt instruments or bond instruments.
- Mutual Fund (MF): MFs, issued and operated by financial institutions, are a means of pooling funds that are invested in various financial instruments. Profits from investments are distributed to investors in proportion to the number of units or investments held. These are called “active” management products, where the fund manager consults you on what to buy and sell on your behalf and can generate better returns than the benchmark (such as NIFTY).
- Exchange Traded Fund (ETF): ETFs, which are becoming increasingly popular, basically track indexes like NIFTY and SENSEX. When you buy one unit of an ETF, you own a portion of NIFTY's 50 stocks with the same weight as NIFTY owns. These are called 'passive' products and typically cost much less than MFs and offer the same risk or return profile as an index.
- Derivatives: Derivatives derive their value from the performance of an underlying asset or asset class. These derivatives include commodities, currencies, stocks, bonds, market indices, interest rates, etc.
Different types of stocks to invest in 2024
When researching stocks and MFs, the word “market capitalization” comes up. Market capitalization or market capitalization is the value of 100% of a company. In simple terms, it means, for example, if a company's market capitalization is Rs 10,000 crore, how much would it cost to buy all the shares of that company?
There are three classifications of stocks based on market capitalization. Many mutual funds and ETFs are categorized based on the market capitalization they focus on, so this is important to understand.
- Large cap stocks: SEBI defines large-cap stocks as the top 100 stocks by market capitalization. These companies are some of the largest companies in the country by sales, are well-established, and are typically market leaders in their respective industries. Although these are considered the least risky, they may not have as high growth rates as mid-cap and small-cap stocks. However, it may offer higher dividends and safer capital reserves in the long run.
- Mid-cap stock: SEBI defines mid-cap stocks as stocks in the top 101 to 250 by market capitalization. This usually means companies with a market capitalization in the range of Rs 8,000 crore to Rs 25,000 crore. These companies are smaller and capable of higher growth than large-cap stocks, and can destroy large companies or grow into large-cap stocks. They are considered riskier than large-cap stocks, but lower risk than small-cap stocks.
- Small cap: SEBI considers all stocks below the top 251 by market capitalization as small-cap stocks. These are stocks of smaller companies and are often highly volatile. Compared to the other two, these are considered very risky, but may offer higher returns. Small-cap stocks also have less “liquidity,” so there aren't as many buyers and sellers as large-cap stocks.
Apart from market capitalization, stocks are categorized by industry, dividend amount, growth rate, etc.
How to know which stocks to buy
- Determine your risk appetite
Risk appetite is the amount of risk you can tolerate. Some factors that influence risk appetite include investment schedule, age, goals, and capital. Another important variable to keep in mind is current liabilities. For example, if you are the only income earner in your family, you are less likely to take risks. Here, your portfolio may include more debt and large-cap stocks.
On the other hand, if you are young and have no dependents, you may have a higher risk appetite. This can result in higher exposure to equity than debt. Within stocks, you may be able to invest in riskier small-cap stocks. The starting point is to make choices keeping in mind that risk and reward go hand in hand.
- invest regularly
Now that you have created a demat account, you need to allocate your funds for regular investments. Set a personal budget, track your spending, and see how much you can set aside. The best way to invest in the market is through a Systematic Investment Plan (SIP). With SIP, you invest the same amount in mutual funds etc. every month. This allows you to average out different market levels, maintain good investment habits, and slowly increase your investment amount once you gain confidence.
- Build a diverse portfolio
The basic rule for building a portfolio is to invest in a variety of assets. This is to minimize the impact if a particular asset underperforms. Diversification spans asset classes, industries, and cycles. You may be tempted to put all your money into an industry that is on the rise. However, it is always better to balance market capitalization exposure, diversify across industries, and offset the risk of stocks with stable but lower-return bonds. Finally, use SIPs to ensure that you are investing in securities across different market cycles.
- Rebalance your portfolio
As your priorities change over time, your portfolio should also change to reflect this. You should rebalance your portfolio every few quarters to avoid becoming over- or under-exposed to any particular stock or asset class. This is also necessary as you get older and your priorities change. For example, when you start a family or approach retirement age, you may want to lower your risk.
conclusion
Anyone can invest in the stock market. This is a life skill that needs to be honed, and like all good things, it takes a little patience, time, and study. By making thoughtful investments, you can make your money work for you and achieve your goals and dreams.
