What are the things to know before you start investing in stock market in India? Let’s have a look.
Many people have had thoughts to start investing in the stock market, especially during lockdown. Since most of us were locked in our homes, some watched movies/series, some looked for ways to enhance their skills. But almost all have wondered how they can start earning money from the comfort of their house. This can easily be achieved with the help of stock market.
Many people have this disbelief regarding the stock market that it’s too risky, or there are greater chances of losing money than making money.
I will try to explain how you can start investing in the stock market in India, and what is the ‘RIGHT’ way to do it.
Table of Content…
Why Invest in Stocks?
The first thing you must understand is the reason why you need to invest in the stock market. The short and simple answer to this is, every ₹1 that you earn, you decide whether you want to become rich with it or not. This is because when you spend your money on liabilities, you lose that money forever. But when you invest that money in assets, with proper research, it will work for you for a lifetime. This means that money has become a slave for you for life.
For example, Rakesh Jhunjhunwala in 2003 bought Titan’s stock at ₹3/share, and last year (2020) Titan gave a dividend of ₹4/share. That means he’s getting an even greater dividend from the same stock which he bought at a lower price. I guess this is enough motivation for you to understand how money works for you in the stock market, and how financial literacy can lead you towards financial freedom. But all this is possible when you ACTUALLY start investing in the stock market.
How Much Money is Needed to Start Investing?
The first thing people wonder is how much money is needed initially to invest in the stock market. The good news here is, in the stock market you can start with an amount as minimal as ₹100. And according to me, you should begin with little investment because when we start learning while we are new to something, we tend to make mistakes, so when you start with a minimal amount, your mistakes don’t cost you much but teach you a lot instead.
This is one of the reasons why initially you should invest only which you can afford to lose, such as your pocket money. And also, you should NEVER take loans and invest. Never invest any money that you may need in the short run. And if possible, make an emergency fund so that during times of emergency and uncertainty you don’t have to sell any stock.
How to Pick and Research Stocks as a Beginner?
To answer this question, if I would have written this post, say, 20 years ago, it would have been very difficult as I would have to show various calculations just to come up with one simple ratio, and surf on many websites to find information regarding a single stock. But in today’s time, we’re extremely lucky as we have lots of advanced tools, screeners and websites where we can easily research about companies and get almost all the necessary information that is required.
Websites like screener.in, tickertape.in, in.tradingview.com are highly recommended for beginners. These websites are used not just by beginners and amateurs, but also by professionals and full-time traders.
Where to Start?
To start off, you can go about investing in large-cap companies; this refers to reputed, trusted, and established companies in India (companies like Reliance, TCS, HDFC, etc) because they are relatively less risky and more stable. Now there’s an important thing to understand here – if a company is included in the large-cap, and is stable and trusted doesn’t mean that it is a safe and good investment.
The stability and quality of a company depend on various factors such as growth, ROE, profitability, etc. You will have to dig deeper and do more research to filter out the best companies that are expected to grow in the long run.
What to Keep at Bay?
Now, before investing in a particular stock, you should stay away from cyclical sectors (eg. automobile sector) and penny stocks. Cyclical stocks tend to perform well during bull runs (when the economy is booming) and are hit hard during bear markets (lousy market conditions). Because of this, during a recession, their stock prices are hit hard.
While in the case of penny stocks, these are the stocks that have share prices below ₹10. These stocks are a playground for scamsters and pump-and-dump schemes. New investors generally fall for the trap, thinking that if they invest in a penny stock and when that company eventually grows, they’ll earn huge profits from it and exit when they get handsome returns. But this doesn’t happen because penny stocks generally hit circuits, and during such times, it is not possible to sell or buy stocks as the buying/selling threshold of that company has reached its peak.
As a beginner, you should go for sectors that have relatively low risk; one such example is the FMCG sector (Consumer staples). Customers don’t have second thoughts while purchasing daily-use products like soaps, cosmetics, beverages, etc as they are relatively cheap and don’t put a stress on your wallet.
These sectors tend to perform no matter what the market conditions are because let’s face it, you’ll buy oil, toothpaste, and food items even during times of recession. At the same time, you won’t buy a car when you don’t have money in your bank account and when the economy is struggling.
Whenever we talk about investing in the stock market, people think about stocks that are in the news daily. All these stocks tend to be in the news because they are extremely volatile, which means they fluctuate a lot – this might be good for traders but dreadful for new investors. Now imagine, a person wants to buy a stock for the first time, and that stock hits the circuit daily and fluctuates a lot – new investors get scared and give up thinking that the stock market is a gamble. If a person buys stocks only because they see that the stock price is rising, that, according to me, is speculation, not investment.
Whenever you feel that there’s a chance of permanent loss of capital or when you’re not confident whether the company will survive in the future or not, you should always avoid such stocks. And this is an essential piece of information as there are a lot of beginners in the stock market, but very few people finish with handsome returns. Many beginners try to hit the ball out of the park with their first shot; this is rarely possible. They must understand that they have to play the long-term game, and in the long run, compounding will hit big shots for them.
Financial literacy is an endless journey. The more you learn, the more you earn. Stock market has a very dynamic environment that constantly changes and evolves. You can keep up with the market only if you continue to educate yourself, only then will the market reward you.