Investing with stocks has tremendous potential to generate wealth over a long time provided you are well acquainted with the process of investment in the share market. But how to invest in stocks is the main question and to do that you must know the basics of the share market, which will let you understand many concepts about the investments you are going to encounter during your investment journey.
If you have gone through all this and are ready to start your investment with the stock market but are not sure how to take your first step, then you are at the right place. There are some basic things you must be clear with before diving into the sea of investment that is the share market or the stock market.
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What are stocks or shares?
Share in layman’s terms is a portion of something and it has more or less the same meaning in terms of the share market. Share is just a portion of ownership of any company offered to investors if he invests money in purchasing shares of the company. After purchasing the share, the investor becomes a shareholder of the company in the same proportion as the percentage of shares held by him. All this process functions under the close watch of Security Exchange Board of India (SEBI).
Let’s try to understand the things to make it clear for every beginner so as to take the first step of investment confidentially. Here is a step-by-step guide to help you plan and formulate your investment in the share market.
How to invest in Stocks?
How to start investing in stocks will be your first question and it depends on the approach you take for your investments. The approach may be different for different investors because of the budget, and paucity of time with investors. There are mainly two approaches that an investor takes, either he actively picks stocks or he can go for less active investment. Which approach you take can be best described by the simple answers to some basic questions like:
• Whether you enjoy doing calculations and research on numbers?
• Whether you like mathematics or not?
• are you having enough time to dedicate to stock market analysis on daily basis?
• are you interested in analyzing the stocks and finding it interesting to read about companies?
Whatever may be your answer to these questions, one thing is quite clear you are ready to invest anyhow. So, now the main question which remains is not where but how? So there are different ways to invest in the stock market
Picking up Individual stocks
You can go for individual stock picking, but only if you have enough time to dedicate to the analysis of stocks and to follow daily news about the stocks. If you can do it, you are ready to go, but If not then you should pause and think of another approach to take.
If you are taking individual stock picking, then it is understandable thing that quarterly reports of the companies fascinate you. If it is not, then don’t worry there is nothing wrong with it and you are not alone. In that case, you can take a less active or can say passive approach where your involvement will be lesser as compared to the individual stock picking.
Investing with Index funds
Index funds are those which simply track the index of the stock market like the Nifty 50 or Sensex. So in addition to your approach to individual stocks, you can invest in index funds as well. Index funds will have lower costs and it is highly expected that these funds will match up with the stock market performance in the long term.
Budget to invest in stocks
Budget is the prime requirement for everybody before thinking of saving or investing. So to get the answer to this puzzle, we must know how to manage our personal finances. We can talk later about the money we should invest in stocks, but first, we should discuss the money which you shouldn’t invest in stocks. Because the stock market is not a place for the money which you may need in the near future.
The stock market has a tremendous opportunity to create wealth for you but that is in long term, and in short term, its volatile behavior can hamper your financial needs. The fall in the market because of the COVID pandemic is a recent example of volatility, although the market was restored to full swing within months. But you cannot take risks with the money which you are going to need in near future. So, you must be clear about some factors before investing in the share market such as:
• Emergency fund or Breathing fund to cater to your emergent needs. It can be equal to or more than 10 times your monthly expenses.
• Get rid of all dues like credit card debt and outstanding loans
• Must have Term Insurance with you to safeguard the family financially
Asset allocation
This concept comes after you have enough money to invest after clearing all monetary requirements mentioned in point no 2. Asset allocation means how to divide your money into different investment tools because it is rightly said that don’t put all eggs in one basket. It can be termed as diversification of your portfolio as well. Asset allocation depends on many factors such as the financial goals, age, and risk-taking capacity of the investor. Your age plays an important role in the selection of investment tools because as you grow older, it is a general tendency to avoid direct stock picking. You will try to look for more money-making instruments which have fixed income rather than risky stocks.
Here, you can follow the simple principle of subtracting your age from 100 and the percentage amount equal to the answer should be invested in stocks. Or else you can say that you should invest a percentage of your total investment value equal to your age into fixed-income instruments. For example, let’s say that you are 40 years old. This rule suggests that 60% of your investable money should be in stocks, with the other 40% in fixed income.
Open an investment account:
If you are ready enough to take your first step in stock investment, it’s time for you to open an account. Nowadays account opening process is quite easy and takes 3 to 5 minutes with an online procedure. Also, all the brokerage firms with whom you have to open your accounts are offering mobile applications. It makes further easy for an investor to track and control his portfolio at his fingertips. You should open a Demat account with the firm which will facilitate you to invest in stocks directly.
To open a Demat account, you must have a savings account with any of the nationalized banks as it will make it easy to transfer funds to and from your trading account to your bank account. Secondly, you must have a trading account that will allow you to trade in the share market. Nowadays, most companies offer all three accounts in one account, so you can explore the various options that suit you best.
Select your first stock
Once you have gone through all this and made yourself ready to dive in, it is the right time for you to start investing by selecting your first stock. It is possible that you as a beginner might get attracted to social media posts easily and can make a wrong selection in choosing the first stock. But the bad experience is also an experience and it will teach you a lesson for the future. Some basic things you must consider before selecting stocks are:
• Diversification of your portfolio.
• Start only with the stocks which you use by yourself
• Avoid the stocks which have higher movements i.e. volatile
• Try to avoid penny stocks till you get acquainted with stock analysis.
• Learn the fundamental analysis of stock
Diversification means having different types of stocks in your portfolio at a time. It will ensure safe returns for you in the time of market corrections. Also, try to invest in the stocks which you use by yourself, it will instill faith in the brand. And this will take out your fear of market volatility and you can invest freely. If possible, try to avoid highly volatile and penny stocks till the time you did not get accustomed to the stock analysis in detail.
Keep investing
Do you know what is the secret of wealth creation? It is the compounding effect which is also called the eighth wonder of the world. And compounding can do a miracle with your investments if you stay invested for longer terms. So keep investing in the market regularly and tracking the performance of an investment is a must.
You may also like to Read:
- What are Penny Stocks and why you must avoid them?
- What is Insurance and why it is important for us to have?
Final words
Since you are aware of what to follow before taking your first step in the share market, it is advisable to always be ready for market corrections or downfall. It is a phenomenon that is going to happen and as a long-term investor, it should not bother you at all.