Investing in Stocks- A Handy Guide for Beginners

Last Updated: August 9, 2021

There is no one size fits all formula towards investing in stocks. Many people write queries on how to invest in the share market or which share to buy today or even how to invest in stock markets. However, it all depends on knowledge, interest and aptitude towards investing. If there is no intrinsic meaning in investing, then it will not work if you are purely attempting to gain profits.

Of course, knowledge of certain important terms like compound interest, opportunity cost, ROI, EBITDA, market cap, ROE, Intrinsic value or gross profit formula is also necessary. The first thing you should know is what essentially makes up the share market or stocks.

Table of Contents

• What is the Share Market?
• What are Stocks?
• Why is there Fluctuation in Stock Prices?
• Concept of Stock Market Capitalization
• What is meant by dividends?
• How can beginners invest in the stock market?
• The Procedure of Investment
• FAQ

What is the Share Market?

Beginners should begin their journey towards investing with a solid understanding of what the share market actually is. The share market is the market where shares are publicly traded and issued. A share is the document which helps in validation of your ownership in any company or the stake meaning in a simpler language. For enabling this exchange, the market place has been created for investors to purchase and sell shares

What are Stocks?

What is the stock meaning? Stocks are equity based investments which are representative of legal ownership in any entity. You become a part owner of the entity when you buy shares in the hope of earning good returns in the short, mid or long term. Stocks are issued by corporations for raising money and it basically has two variations, namely common vs. preferred. The common stock will entitle the stockholder towards a proportionate share of any profits or losses of a company while preferred stock comes with a dividend payment which is predetermined.

Why is there Fluctuation in Stock Prices?

Before getting into the compound meaning or advanced market concepts like share buyback and investing commodity markets, it is important to understand why stock prices actually fluctuate. The stock market essentially functions in the manner of an auction. Sellers and buyers may be individuals, governments or even big corporations. The stock price will come down whenever there are a higher number of sellers as compared to buyers. The prices will however increase when the buyer count is higher than the number of sellers. This is the simple principle of demand and supply which leads to fluctuations in stock prices. Prices are not directly impacted by the performance of any company. Rather, reactions to the performance by investors will determine the fluctuation in stock prices. More people will want ownership of a stock if the company is doing well, leading to an increase in stock prices. The opposite happens whenever a company does not perform well, leading to a drop in prices.

Concept of Stock Market Capitalization

The market capitalization or market cap of any stock is the sum of total shares outstanding which is multiplied by the share price. For example, if a company’s total outstanding share volume is 1 lakh and the share price is Rs. 10 each, then the total market capitalization will be Rs. 10 lakh. Market capitalization enables evaluation of any company for investment in the context of similarly sized entities in its sector. Small cap, mid cap and large cap stocks exist in the market, representing small, mid and large cap companies. This is one factor that you should always keep in mind.

What is meant by dividends?

Dividends are quarterly payments which are dispatched to shareholders by several companies. Dividend investing indicates portfolios having stocks which consistently pay out dividends over the years. The stocks produce a passive and reliable stream of income and this may benefit people at the time of retirement for instance. You cannot judge any stock by only the dividend factor since companies will increase dividends at times in a manner of attracting more investors whenever any underlying entity is facing difficulties.

How can beginners invest in the stock market?

Investment is a manner of putting money aside when you are busy and keep it working for you in order to completely reap the benefits of your investment in the future. Investing is a way towards a happier financial future and in the words of iconic investor Warren Buffet, it is the process of laying out money now to receive more money in the future. The goal behind any investment is to get money to work in one or multiple kinds of investment vehicles with hopes of growing money over a sustained duration. Investing can thus be called the act of committing any capital or money towards any avenue with expectations of garnering additional profits or income. Unlike consumption, investing allocates money for the near future in the hope that it will grow over a sustained duration. Investments are also accompanied by the risks of losses. Investing in the stock market is the commonest way for beginners to gain more experience in this domain.

Here are some key stages of the investment journey that you should make a note of:

• Documents needed for stock investments- The vital documents needed include the Aadhar card, PAN card, name on a canceled cheque from an active bank account, proof of residence on the basis of a list of documents which have been accepted by the broker, bank or depository participant and documents detailing your income and earnings. Passport sized photographs are also needed.
• Demat Account- A demat account is one which will hold shares in the name of the account holder. A demat account is an electronic house for shares. It is opened online with assistance from the depository participant. Many banks also provide demat account services for investors. Opening a demat account is a simple procedure which may be done anywhere and anytime within a few minutes itself.
• Trading Account- A demat account is followed by setting up the trading account. Demat is the dematerialized account or storehouse for all shares. The trading account is the specific account from which you are buying and selling your securities that you are desirous of trading on the stock market. When it comes to stock investments for beginners, you should have both the demat and trading accounts in your name. The NSE (National Stock Exchange) and Bombay Stock Exchange (BSE) are both primary exchanges where several high quality stocks have listings. Yet, some stocks will not be available on both exchanges simultaneously. You should open a trading account with a DP (depository participant) who offers trading facilities both for the NSE and BSE.
• Linking Bank Account- Since you are choosing stock investments, you will be purchasing and selling the same over a period of time. You will need a bank account which is linked to the trading account for this purpose. This makes sure that inflow and outflow of cash is seamless while trading. This is a mandatory requirement at most brokerages where you open demat and trading accounts. Two in one accounts are also offered by some brokerages, which function as both trading and demat accounts. Three in one accounts also function as demat, trading and bank accounts.

The Procedure of Investment

How does the investment procedure pan out? Here are some vital aspects to remember in this regard.

 

1. Investments in Primary Share Market- Whenever you are choosing to invest in the primary share market, you can do this with an IPO or initial public offering. This will require a demat account for holding electronic copies of shares purchased along with a trading account for applying online. In some scenarios, applications may be done through the bank account too. On the basis of market responses to IPOs, a select quantity of shares will be allotted for the investor. Post receiving all IPO applications and once they are counted by the company in question, these shares will thereafter be allotted on the basis of overall availability and demand alike. Applying for an IPO via net banking accounts is a simple affair and the procedure is known as ASBA (Application Supported by Blocked Amount). Assuming that you have made an application for buying shares worth Rs. 2 lakh, this amount will be blocked in your bank account instead of being dispatched directly to the company. Once the shares are allotted, the exact sum will then be debited with the balance amount being released likewise. All IPO based applications have to mandatorily follow this method. Once allotment of shares is done, they will be listed upon the stock exchange and trading can commence within a week’s time.
2. Investments in Secondary Share Market- The secondary market is usually known as the stock market. This is where all investors buy and sell stocks. To invest in this market, a demat account will be needed and this has to be linked to the bank account. With regard to investing in stocks in this market, one should first set up these two accounts and thereafter login to the trading account before choosing the shares to be sold or purchased. Make sure that you have necessary funds in the account which will help you purchase shares. Alternatively, if you are going to sell, ensure that you have the suitable amount of shares prior to choosing to sell. Decide on the price at which you wish to purchase a share versus selling it. Wait for the seller or buyer to respond to the request. Finish the transaction in the stock market by transferring the shares/money and you will get shares/money in return. The procedure of investment is quite simple for beginners although it may initially appear a little complex.

FAQ

• Q: How do I start investing in stocks as a beginners guide?
  A:

  You should first have all the necessary documents for investments including PAN Card. Set up the demat account for holding shares and then the trading account before linking your bank account to the same. Thereafter, you can commence trading likewise.

• Q: How much should you invest in stocks first time?
  A:

  There is no hard and fast rule for investing in stocks for the first time. You can start with amounts as small as Rs. 100 or more, depending upon what you are comfortable with.

• Q: What stocks should I invest in as a beginner?
  A:

  Experts usually recommend that beginners start investing in stocks of reputed companies like ITC Ltd, Tata Motors, Marico Ltd, Dabur India Ltd, Ashok Leyland Ltd, Biocon Ltd and ICICI Prudential Life among others.

• Q: Can I invest 100 RS in share market?
  A:

  You can of course invest Rs.100 in the share market or even an amount which is considerably lesser. It all depends upon what you are comfortable with and can afford to invest initially.