Last Updated on Sep 29, 2022 by
Investing is a way of achieving your financial goals, like buying a horse, funding your child’s education, being financially stable post-retirement, and many more. It is allocating your money towards an asset with the hope that it’ll make your future better financially. There are various investment options available in the market. Each investment comes with its own goal, risk and returns. Amongst several investment options in India, stocks are a popular option. In this article, learn about stocks, types, how to invest in the stock market, pros, cons and more.
Table of Contents
What are stocks?
In simple terms, stocks are the share of ownership in a company. These are also known as ‘equities’. Based on the entire company’s value, the price of each share is decided. So when you buy shares of a company, you own a small portion of that public corporation.
For example, Rahul wants to start a company and needs an investment of Rs. 10 lakh. But he has only Rs. 4 lakh. So he asks 2 of his friends to invest in the company. He gives them 30% of the company’s ownership in return. After 5 yrs, the company is performing well and is valued at Rs. 50 lakh, the value of the investment of Rahul and his friends increased by 5 times.
Therefore, when the company’s value grows, your investment also grows. But you can’t buy stocks in any company you like. For an outsider to buy shares in a company, the company must be listed publicly in the stock market.
What is the stock market?
The stock market is a platform where shares of companies trade. The buyers and sellers of different companies’ shares come together and trade in the share market. The stock market provides the details of the liquidity that an investor requires after purchasing a share of a particular company.
In India, there are two national-level stock exchanges: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). When private companies list themselves on the stock exchanges, they become public companies where anyone can buy or sell company shares.
Why do companies list shares on the stock exchange?
The reason behind this is simple. When companies want to raise capital for their business, they sell their shares. The raised capital can be used for anything per the company’s choice, like launching a new product, enlarging facilities, or expanding into a new market.
How does a stock market work?
For stock traders, the stock market is a trading platform. When an investor wants to buy a publicly-listed company’s stock from a stockholder, the transactions happen on the stock exchange. The stock exchange finds the potential buyer for stock and matches them with the seller. They charge a commission fee for performing the trade.
Types of stock markets
If you are planning to invest in stocks, you need to understand that there are two types of stock markets.
1. Primary stock market
When companies want to list themselves publicly, they first issue shares through Initial Public Offering (IPO). It is a market where company shares are issued to the public for the very first time.
When companies decide to go public, they reach out to an underwriter. An underwriter will take care of all the legal formalities. According to the demand in the market, they determine the accurate share price and the right time for the issue.
Once the issuing time and price are fixed, a window is opened for the investors to subscribe to the shares. If the issue is oversubscribed, then the subscribers will receive shares on a pro-rata basis. One important thing to be noted is that the primary market’s money directly goes to the company for its future operations or expansion.
2. Secondary stock market
After the company distributes the shares, the shareholders will have them in their accounts. But if the shareholders want to sell their shares, they need to find a buyer. If no buyer is found, the investment becomes illiquid, which means they couldn’t sell the shares at the time of need. To solve this problem, the shares are traded in the secondary market after the primary market.
The seller and buyer place their bids in the secondary market and perform the transaction. The shareholder will liquidate the shares, and the new buyer will have shares, and this process continues.
How to invest in the stock market?
Once you understand the working, investing in the stock market is simple. It involves a few steps as follows.
1. Select an intermediary (broker)
In the stock exchanges, direct buying or selling shares by individuals is not allowed. Only an authorised company or individual by the Security and Exchange Board of India (SEBI) is permitted. These companies or brokers act as intermediaries and can trade shares in a stock exchange on your behalf. For the intermediary service provided, the broker charges a fee from you.
2. Open a Demat account
Demat account is used to hold shares and securities in electronic format. Earlier shares were issued in paper format, but now everything is digitalised, and shares are issued in electronic form. All the electronic securities and shares that individual purchases are kept in electronic form under the Demat account.
Documents need to open a Demat account are,
- Photo ID proof like PAN card, Aadhaar card, driving licence or voter ID card.
- Address proofs like driving licence, passport, utility bills, etc.
- Proof of the bank account like a bank passbook or account statement
Steps to open a Demat account online
- Visit your broker’s website and open a Demat account for free.
- Fill out the Demat application form.
- Scan and submit the required documents.
- Provide your bank account details to transact.
- Once your account is verified the Demat account will be opened.
3. Buy a share
- Once the Demat account is opened, you are all set to start buying or selling shares on the stock market. Shares can be bought by giving instructions to the brokers. If you want to buy a share, you must provide the broker with price and quantity instructions. Once the price in the market matches the provided price, then the trade is executed. If you are buying a share and want to take delivery, it will take a few days to reflect the shares in your Demat account. It is called the settlement period.
- You can directly buy a share on the online trading platform. Current BID/ASK prices reflect each share in the trading platform. So you can give buying instructions directly on the online trading platform provided by the broker.
How to pick a stock?
This is the first question that pops into the mind of every beginner investor. There are several companies in the market, and how to pick the one that suits you? To pick a suitable stock, you need to understand the types of stocks. Different types of stocks are classified based on several factors, as follows.
- Based on stock class: When you buy stock in a company, you also get voting rights. Voting rights come into the picture when any changes are made in the company’s management. However, not all companies allow their shareholders to vote. If you pick a company that offers voting rights, you get to cast your vote regarding different aspects of the company.
- Based on market capitalisation: Stocks are classified according to the company’s market value. There are three types of market capitalisation.
– Large-cap stocks – These are large-scale companies with a market cap of more than Rs. 4,000 cr.
– Mid-cap stocks- These are medium-scale companies with a market cap of Rs. 250 cr. to Rs. 4,000 cr.
– Small-cap stocks – These are small-scale companies with a market cap of up to Rs. 250 cr.
Read the difference between large-cap, mid-cap and small-cap stocks to understand better.
- Based on ownership rules: There are 3 types of stocks in this category:
– Preferred and common stocks – Preferred stocks offer a fixed amount of dividends to the shareholders every year. In contrast, common stocks do not provide dividends.
– Hybrid stocks – Some companies offer preferred shares which can be converted to common shares. These are called hybrid stocks.
– Stocks with embedded-derivative options – These provide ‘callable’ and ‘puttable’ options. Callable means the company can buy the stocks back at a certain price and time. Puttable means the shareholder can sell the shares back to the company at a certain period and price.
- Based on dividend payment:
– Growth stocks – These stocks do not pay high dividends as the company would reinvest the earnings for operations.
– Income stocks – These stocks offer high dividends to the shareholders.
- Based on risk:
– Beta stocks – It is a risk measure of the stock. Higher the beta, the higher the risk quotient of the stock.
– Blue chip stocks – These are well-established companies with stable earnings. They have low liabilities like debt, which helps the company to pay regular dividends. These are known as blue-chip stocks.
- Based on fundamentals: Value investing investors believe that the share price must be equal to the intrinsic value of the company’s share. If the share price is more than the intrinsic value, it is considered overvalued. If the stock price is less than the intrinsic value, it is undervalued.
- Based on price trends:
– Defensive stocks – These are quite unmoved by the economic conditions.
– Cyclical stocks – These are highly affected by the market conditions and can see high fluctuations in the share price.
You can use Tickertape Stock Screener to get the list of all the stocks, which can be filtered based on the types and factors.
What are the fees involved while investing in stocks?
The fees involved while investing in the stock market are,
- Brokerage fee – This is a fee the broker charges for the transaction. The charge depends on the value of the contract or a flat rate (varies at each broker). A few brokers in India charge zero brokerage fees.
- Securities Transaction Tax (STT) – This is a mandatory charge collected by the broker and paid to the Income Tax Department of the Government of India. It is 0.1% of the transaction value.
- Stamp duty and GST – As the transaction involves the transfer of security from one party to another, Stamp duty is charged by the state government. Central and state GST of 9% each is charged for the transaction carried out at the brokerage.
- Transaction charges – The stock exchanges charge this. They levy a fee for trading shares. The rate varies at each stock exchange in India. SEBI charges 0.0002% of the transaction amount as a turnover fee.
- Depository participant – These are charged by National Securities Depository Limited (NSDL) and Central Depository Services Ltd (CDSL) for keeping your securities safe.
Taxes on investing in stocks
Before calculating the taxes on the stocks, determine under which category your investments would fall. There are two types of capital gains.
- Short-term capital gains (STCG) – If the investment holding period is less than 12 months, it comes under STCG. They are taxed at 15%, irrespective of your income tax slab.
- Long-term capital gains (LTCG) – If the investment holding period is more than 12 months, it comes under LTCG. If the selling price of your shares is higher than the purchase price, it is considered a long-term capital gain. If the shareholder makes a capital gain of more than Rs. 1 lakh on selling the shares, the gains will be taxed at 10% plus whatever tax is applicable according to the income slab.
- In the case of loss, the loss can be offset or carried forward for up to eight financial years.
Things to check while investing in the stock market
Though investing in stocks is easy, there are certain factors to remember while putting your hard-earned money into an asset.
Decide how you want to invest
The first and foremost factor to check while investing is how you want to invest. There are several ways you can invest in stocks.
- Types of stocks: As discussed earlier, you can pick the stocks of your choice and buy them.
- Dividend reinvestment: A few companies provide dividends for their shareholders. Companies distribute their earnings to their shareholders, and this is called dividends. The dividend provided is decided by the board of directors of the company. It is paid quarterly.
The dividend is either credited to the shareholder’s account or reinvested in the company again. The shareholder can decide on this and make an agreement. However, it is not mandatory for all companies to offer dividends.
Decide your investment amount
Once you have decided on the type of stock, you need to plan how much you want to invest in one particular stock. How much ever you invest, ensure you have saved enough money in the emergency fund.
Compare costs and fees
Now that you know you cannot buy stocks without a broker, several brokers are in the market. Though there are certain fees and charges which are the same across all the brokers, the brokerage fee is something that is charged by the broker. Compare the fees and charges charged by the brokers and ensure they are SEBI registered.
Though fees and charges are the primary factors to check at a broker, it is equally important to check how well the broker platform performs.
Managing your portfolio
Investing in stocks is not just investing and forgetting. It is necessary to keep an eye on the performance of the stock. If you are close to retirement, you may want to move the maximum share of your investment to a safe option. Pay attention to your investment objective and age.
Advantages of investing in stocks
- Chances of high returns in a short period of time – This is the primary advantage of investing in stocks. Compared to other investments, the returns are high, that too in a short duration.
- Ownership in the company – Irrespective of the share size, you get a portion of the company when you buy shares in a publicly listed company. This will grant you voting rights in the company, and get dividends, bonuses, etc.
- High liquidity – There is no lock-in period in the stock market investments. Investors can buy or sell shares easily on the stock exchanges.
- Monitored by SEBI – SEBI regulates the stock market. They have strict rules to adhere to that safeguard the interest of the shareholders.
- Tax benefits are offered according to the investment holding period.
Disadvantages of investing in stocks
- Volatility – Stock market investments are considered highly risky as the markets are volatile and the stock prices keep fluctuating often.
- Risk – It is the possibility an investor can experience losses due to various factors. Risk is classified into two types,
– Systematic risk – This tends to affect the overall market and cannot be escaped even through portfolio diversification. Ex: natural calamities, terrorist attacks, political issues, etc.
– Unsystematic risk – This is specific to the company or the industry. Investors who diversify their investment portfolio can eliminate this.
- Shareholders are paid at the end – When a company winds up its operations, stockholders will be paid at the end, while bondholders and creditors are paid first.
- Emotionally bounded – Many investors buy a stock at a high price out of greed and sell at a low price out of fear. This is because the stock market is volatile.
To become a successful investor, you must understand the market well and make conscious choices. To become a successful stock market investor, you must remember a few crucial factors. That includes knowing your investment objective and risk appetite, diversifying the portfolio and not panicking about market fluctuations. If you find it difficult to understand the working of the stocks, get a financial advisor who can guide you rightly.
1. How to find the best stocks in India?
There are several stocks in the market. Finding the best stock depends on various factors like market capitalisation, risk type, class, etc. You can use Tickertape Stock Screener to filter the stocks based on different factors and find the best ones.
2. How to find the best stocks on Tickertape?
3. What is the difference between stocks and shares of a company?
Share is part ownership in the company. When a company issues shares, they sell part of its ownership to investors who buy it. So, when you buy a share, you become a part-owner of the company. After a company issues shares, the company becomes public, and all the new shareholders become the company’s actual owners. The shareholders appoint a Board of Directors, who sees whether the company’s management works in its best interest. When a shareholder’s shares are fully paid, the shareholder can convert its shares into stocks. A group of shares held by a shareholder is called stock.
4. Should we link our Demat account to the bank account?
Yes. It is mandatory to link your Demat account to the bank account to perform stock trading.
5. Can I invest a small amount of money in the stock market?
Yes. You are allowed to invest a smaller amount in the stock market. However, a small investment makes it difficult to diversify your investment.
6. Is the stock market safe for beginners?
The safety of any investment depends on the way an investor approaches it. Most of the investments that offer good returns come with risk. Though there are investment options like fixed deposits, etc., with low risk, the returns provided are not as high as an investment like stocks. It is advised to understand the company and market to mitigate the risk. Most importantly, diversify your investment. Diversifying can help you cut down the risk. Even if one investment is falling, the other in the portfolio should help compensate for the loss.
7. Can I invest in US stocks from India?
Yes. You can invest in US stocks from India. You need to open an international trading account from a trusted broker to invest in the stock market in the US.
8. Is there a maximum limit to investing in the stock market?
No. There is no maximum amount you can invest in the stock market. You can invest how much even you want to. However, ensure you have saved enough for your emergency funds before investing in the stock market.
9. Can NRIs invest in the Indian stock market?
Yes. NRIs can invest in the Indian stock market through RBI regulated Portfolio Investment Scheme (PIS). They need to hold a Non-Resident External (NRE) account, a PIS account and a Demat account.
10. What are stock market timings?
For regular trading, the stock market opens at 9:15 AM and closes at 3:30 PM. It is open Monday to Friday. The stock market is closed on Saturday and Sunday.
11. How to find out if a stock broker is verified?
A legitimate broker displays their SEBI registered broker ID on their official website. You can further ask the broker for their SEBI certificate.
12. Is there a maximum number of companies we can invest in?
No. There is no minimum or maximum limit on the number of companies you can invest in.