How to invest in stock markets is a commonly asked question, we will try and answer it in a series of articles.
We are going to take a step-by-step approach:
- Choose a broker
A broker is a member of the stock exchange who facilitates buying and selling of shares. There are hundreds of brokers. Click here to see the list as per SEBI. The list is intimidating. For a beginner I would suggest going with:
- Zerodha – Discount broker – Review Coming soon
- ICICI Direct – Backed by ICICI Bank – Review coming soon
- HDFC Securities – Backed by HDFC Bank – Review coming soon
- Sharekhan – Backed by BNP Paribas – Review coming soon
I encourage you to do more due-diligence before deciding on one of these brokers.
- Open the account
Before you hand over your documents make sure to negotiate the brokerage and ask them for all the details for brokerage plans.
A few of them might not have the option to negotiate(Zerodha) but others will negotiate. It makes a huge difference.
Once a choice of broker has been made we need to open an account.
Call up the broker or visit their site.
Keep the following documents ready:
- Aadhar Card – would be better if you have your mobile linked.
- Cancelled cheque with your name printed.
(Passbook 3months/6months, Bank statement stamped by bank)
- Passport size photos
Make sure you fill out the nominee form.
You can do it later but its better to get it done right then and there. Customer service while opening account is highest.
Now we have our account open, we need to check a few things in our life before starting on our wealth creation journey. Checklist before investing:
- High interest loans, if any, are paid up – example credit card bills.
- 6 months basic necessities(rent, food, school fees etc) and loan requirement in bank. Or income to sustain all the aforementioned.
- Life and Health insurance up-to-date.
- The aim should be to invest in companies which increase in value year after year. i.e. bluechips. Example: NESTLEIND, RELIANCE, COLGATE.
Investopedia definition of bluechips: Click Here
- Don’t trade based on tips. Do your research.
This is an old ad-age, the problem with tips is 1 out 10 will be profitable but exiting while it is profitable is highly doubtful.
- Know when to Sell.
This is the most tricky part. You bought a share at 100 and now the price is 150, do you Sell? It is easy to get swept up in the feeling of the price will keep going up. Always decide at what price do you want to Sell and take your profits. Here is something a little more advanced: using covered calls as exit(coming soon).
- Sell at a loss, sometimes.
While this is not a beginner concept, it is important to know right at the start.
Everyone picks a stock/share which ends up in a loss, admit your mistake, take the loss before it increases and exit the stock. Sure it might go up again in some time but you will have other stocks to choose from in the meantime.
- Don’t buy into one company or sector
Diversify your potfolio, this simply means that don’t buy just one company or sector(all oil and gas companies or all automobile related companies). Different secotrs and companies help you avoid a downturn in a particular sector.
- Take a part of your profits and enjoy/reinvest them.
If you have profits, take some them out of the equity market, enjoy them or put them in something other than equity.
- How to start building a portfolio
- Smart portfolio builder
- Which share to buy and sell – Stock screener
Get into some really good market-related books: