What’s common between Rakesh Jhunjhunwala and Warren Buffett? That’s right. Both made immense wealth by investing in the stock markets. Like them, there are many more!
Whether you are a trader or an investor, the stock markets offer a lucrative opportunity to convert your savings into wealth.
But remember that it isn’t a one-way street. Stock markets can at times be volatile, and the rewards are accompanied by certain risks. So as a beginner, you must be wondering how to invest in stock markets.
This article will serve as a quick guide on how to invest in stock markets. We will cover:
- What is a Stock Market & its Types
- What is a Stock Exchange
- Step-by-Step Guide on How to Invest in Stock Markets
What is a Stock Market & its Types
Before learning how to invest in stock markets, let’s start with the basics – of what exactly is a stock market.
A stock market is a place where people buy and sell shares of a listed company.
Let’s consider ‘ABC’ as the listed company:
- The price at which you can buy one share of the company = Share Price
The share price of a company fluctuates based on its demand and supply. Business fundamentals, financial health and other domestic and global factors can have an impact on the demand for a company’s stock.
- Share Price X Total Number of Publicly Traded Shares = Market Cap
Based on its market cap, a company is classified as Large Cap (Market Cap of > 20,000 crore), Mid Cap (Market Cap between 5,000 – 20,000 crore) and Small Cap stock (Market Cap < 5,000 crore).
Let us now understand the two types of stock market.
- Primary Market: This is where the companies make their debut in the market. Simply put, the Initial Public Offering (IPO) of a company happens in the primary market.
- Secondary Market: Once the IPO period is over, the company lists on the stock exchanges, and its shares are then traded in the secondary market. To invest in both the Primary or the Secondary Markets, you need to have a Demat & Trading account.
Besides shares, you can also invest in mutual funds, ETFs, bonds, derivatives and other financial instruments. The functioning of the stock market is governed by the Securities and Exchange Board of India (SEBI).
Click here to open Demat & Trading account with PL, and start your wealth creation journey
What is a Stock Exchange
A Stock Exchange or a bourse facilitates the buying and selling of shares. In India, the National Stock Exchange (NSE) and the BSE (formerly Bombay Stock Exchange) are the key stock exchanges. To invest in the stock markets, you need to know about the key exchanges.
Here’s a quick glance at their details:
|Benchmark Index||Nifty50 (Top 50 companies)||Sensex (Top 30 companies)|
|Number of companies listed||~1600||~5200|
When the prices of stocks in the benchmark indices fluctuate, they move up or down accordingly. When Nifty and Sensex move up, market is said to be bullish, and when it moves down, it is called a bearish market. These indices signify broad market sentiment, and are also used to gauge the performance of your other investments.
Step-by-Step Guide on How to Invest in Stock Markets
With the basics in place, we can now delve into the question of, how to invest in stock markets.
#1 Open Demat & Trading account
Having a Demat & Trading account is a pre-requisite to investing in the stock market.
PL is a SEBI-registered depository participant that provides demat & trading account services. As a PL client, you can invest not just in equity, but also derivatives, currency, commodity, mutual funds and insurance. Our comprehensive wealth bouquet ensures that you can address all your financial needs under one roof.
For more details, click here
#2 Know Your Requirement
Every investor has a unique financial goal, risk appetite and investment horizon. Clearly define yours, and use it as one of the key filters before making any investment in the stock markets.
For example, if you are risk averse, then your allocation to equity would be lower, and you would stick to investing in fundamentally strong large caps.
Alternatively, if you are investing for a longer term, and have moderate risk appetite, then you should invest more in equity, across market caps.
Don’t follow a trend, fad or hot tip blindly. Before investing in any asset class, research thoroughly. For equities, there are two key types of research. You can use either one, or a combination of both, before making an investment.
- Fundamental: A method used to identify the intrinsic value of a stock by analysing a company’s revenue, future growth, return on equity, profit margins, and other data
- Technical: A method used by traders to forecast future price movements of stocks by analysing past trading activity
Research can help you identify investment opportunities ahead of the market, and in turn generate better returns.
If you are a PL client, you can access our insightful research here. We also provide personalised advisory and guidance, based on your financial needs.
Your portfolio should ideally be well-diversified. It should have a good mix of stocks across sectors and market caps. Also, it should have a blend of different asset classes, like equity, debt, gold, etc. Understand each asset class closely, and then decide your allocation to each accordingly.
This helps in protecting the overall portfolio from the downside risk emerging in a single sector or asset class.
It is important to have patience in investing. But that doesn’t mean negligence.
Make sure you monitor your portfolio periodically to understand and keep track of the performance of your investments.
Keep track of changing trends, identify emerging investment opportunities, and modify your investments accordingly.
So that’s all you need to know about how to invest in stock markets.
PL provides in-depth research reports and calls, event updates and other thematic research to its clients, which helps them stay updated.
Click here to open a Demat & Trading account with PL, and get started on your wealth creation journey with one of the most trusted and leading financial services brand in India.