A Guide to the Share Market: For Beginners
The share market can be a lucrative avenue to generate wealth and meet your various financial goals. However, it can seem quite overwhelming and confusing, especially if you're new to it. If you know the share market basics, and you are armed with the right knowledge and guidance, trading can be a rewarding and exciting experience. Here is a guide for you to cover the basics of the Indian stock market and help you navigate the trading waters with confidence and ease.
Basic Knowledge of the Share Market
To better understand the share market you should first understand the concept of shares, different types of shares and how their value fluctuates.
What are Shares?
When a company goes public, it offers shares for purchase and these shares are traded on the stock exchange, also known as the share market. These shares represent part-ownership in a company, and by purchasing shares, you become a shareholder in that company.
The price of shares is determined by supply and demand. Higher demand leads to an increase in the price of the shares, and the opposite can cause a drop in the value. All publicly available stocks are listed on the share market along with their current market price.
Types of Shares
The most popular types of shares are ‘common’ shares and ‘preferred’ shares. Owning common shares gives you voting rights at the company's annual general meetings and the right to receive dividends if the company decides to pay them.
Preferred shares, on the other hand, offer a priority in the payment of dividends and in the event of bankruptcy or liquidation of the company. They may also come with a fixed payout agreement, in certain cases.
Share Trading Prerequisites
Trading in shares is a predominantly online process carried out through a broker or an online trading platform. Great care needs to be taken before choosing a reputable broker with low fees and a fast, insightful, and user-friendly platform such as m.Stock by Mirae Asset.
Apart from offering bank-grade security, m.Stock also provides in-depth share market knowledge for beginners including tools such as smart calculators for easy decisions backed by exhaustive fundamental and technical data.
How to Open a Demat and Trading Account?
Most online trading platforms offer a paperless account opening process and an entirely-digital onboarding experience. You need both Demat and trading accounts to trade in shares. While a Demat account is used to store your holdings like digital shares, mutual fund units, bonds, etc., a trading account allows you to buy and sell shares in the stock market.
You can visit the website of your preferred platform to know the specific steps involved in opening an account. Typically, you will be expected to provide your mobile number, authenticate using OTP, fill in the account opening application form, upload KYC documents, and provide bank account information for linking.
People who are not comfortable trading on their own can engage the services of a broker to trade on their behalf. Once you have gained enough experience and confidence, you can switch to trading directly through the online platform of your choice and save on the brokerage charged by offline brokers.
- KYC-related documents such as Aadhaar Card and PAN Card
- valid mobile phone number registered in India
- An active Indian bank account are the prerequisites that are, typically, needed to open a Demat and trading account.
Investing in Shares
Although investing in shares can be a great way to grow your wealth and achieve financial goals, it's important to have a clear understanding of your investment goals and risk tolerance before investing your hard-earned money. While investing in shares can provide higher returns than other investment options, it also comes with risks, including the risk of losing your investment.
There are different strategies for investing in shares, including investing in individual companies or diversifying your portfolio through mutual funds or exchange-traded funds (ETFs). Investing in individual companies requires research and analysis of the company's financial health, industry trends, and other factors that could affect the company's performance. It's important to choose companies with a strong track record of financial performance, good management, and a promising future outlook.
Diversifying your portfolio through mutual funds or exchange-traded funds (ETFs) can help spread your risk across a range of companies and industries. Mutual funds are professionally managed investment portfolios that pool money from multiple investors to buy stocks, bonds, and other investment products. ETFs are similar to mutual funds but are traded like individual stocks on the stock exchange.
Irrespective of the strategy you choose, analysing companies is an important part of investing in shares. There are different methods for analysing companies, including fundamental analysis, which looks at the company's financial health, and technical analysis, which looks at market trends and patterns.
Understanding key financial metrics and reading company reports can help you make informed investment decisions. To know the popular analytical models and strategies you will need to go beyond just the share market basics and gain more knowledge on the subject. Consider this as an investment of time and effort that will reap rewards later on in your trading journey.
Investing in the share market comes with risks, and it's important to manage these risks to protect your investment. One way to manage risk is by diversifying your portfolio across different industries and asset classes. This can help spread your risk and protect your investment from market volatility.
Another way to manage risk is by setting stop-loss orders, which are orders to sell a stock if it falls below a certain price. This can help protect your investment from significant losses in the event of a market downturn.
Tips and Suggested Best Practices
- Staying informed about the share market and individual stocks is important for making informed investment decisions. There are different sources of information available, including financial news websites, investment newsletters, and social media.
- It's important to do your own research and not rely solely on the opinions of others. Reading financial statements and company reports can provide valuable insights into a company's financial health and future prospects.
- Opt for a online trading platform, like m.Stock, that allows you to invest in diverse asset classes and instruments such as shares, ETFs, mutual funds, index funds, debt funds, and so on. Not only does it help in redistributing your risks, but it can also lead to a more stable portfolio that can benefit from the gains experienced in different industries and sectors. Moreover, having all your investments on the same platform gives you clearer visibility of your corpus, helps you make quick decisions, and minimises the chances of redundant investments.
- Be realistic and patient. Use a goal-based investment strategy (mid-term, long-term) and stick to it even during market downturns. Do not sell in panic or buy based on whim, but only when it is backed by research and evidence. There is no fixed way of achieving overnight success in the stock market. Patience and long-term planning are key attributes of a successful trader.
- Be mindful of your risk tolerance and financial capability. No matter how lucrative the opportunity may appear to be, it is advisable to never exceed your predefined risk exposure. Furthermore, it is also prudent to buy equity stocks with the money you have at your disposal. You can borrow from the broker through the means of a Margin Trading facility, however, even in that case, borrow the amount that you can repay on time and without straining your personal budget.