A stock market is a place where company shares are bought and sold. Stock markets also facilitate the trading of other assets like mutual funds, bonds, derivatives, and other financial securities. If you wish to invest in the Indian stock market, you must do so through a brokerage firm that executes trades on your behalf.
Thankfully, the advent of digitisation has made investing in the Indian stock market easier and much more convenient. Investors can now purchase and trade shares on online platforms easily accessible on their smartphones and other mobile devices. However, some beginners are still confused about how to start investing in the Indian stock market.
This article outlines how you can invest in the Indian stock market and what factors you should consider before making your investment.
Also Read: What are shares
How can I invest in the stock market?
If you are wondering how to invest in the stock market, simply refer to the detailed guide below:
Step 1: Open a Demat account
The equity shares you purchase are held in a dematerialised format in a Demat account that acts as a digital repository. To open a Demat account, you need to select a brokerage firm or DP (Depository Participant). You can compare DPs based on factors like fees, user interface, and service.
Step 2: Open a trading account
To invest in the Indian stock market and trade in these shares, you also need a trading account. A trading account acts as an intermediary between your Demat account, where shares are held, and your bank account that has the funds. Most DPs will let you open Demat and trading accounts simultaneously. You need to submit eKYC documents and banking details to open both accounts.
Step 3: Log into your Demat account
Next, enter your credentials, such as user ID and password, to log into your Demat account. Since most brokers offer easy-to-use smartphone apps, you can download their app on your phone and log into the account in seconds.
Step 4: Pick the stock you wish to invest in
Research and study stock options carefully. Pick ones that best align with your investment goals, time horizon, and risk appetite.
Step 5: Ensure you have adequate funds in your account
You can invest in the Indian stock market only if you have enough funds in your brokerage account to cover the purchase cost of the shares. Make sure you have the requisite funds to capitalise on stock price volatility and never miss opportunities.
Step 6: Buy the stocks at their listed price
Specify the order type and outline the number of shares you wish to purchase.
Step 7: Wait for the order to be executed
The seller will respond with an order on the opposite side of the trade. The exchange matches the buy and sell orders by price and time priority. Once successfully matched, the order is executed. The shares are transferred from the seller’s Demat account into your Demat account.
Also Read: Preference shares
Factors to consider before making a stock market investment
Before you start investing in the Indian stock market, you need to consider the following factors:
Investment objectives
To invest in the Indian stock market, you first need to delineate your investment goals and objectives. Your investment objective will help you decide on an appropriate investment strategy. You may have short-term goals like going on a foreign trip or long-term ones like planning a comfortable retirement. Whatever your objective may be, try listing precise objectives rather than vague goals. For instance, instead of setting goals like ‘save for retirement’, opt for specific targets like ‘save Rs. 2 Crores for retirement by 55 years’.
Setting clear goals also helps estimate a time horizon for your investment. How long you have to save and invest for a goal also informs your investment strategy. For goals with a longer investment window, you can follow aggressive strategies, while a more conservative approach may be best for goals due in the short term. You should also rank and prioritise your goals based on their urgency. To invest in the Indian stock market successfully, you also need to adapt and review your goals according to changes in life’s circumstances to ensure they reflect your life’s current aspirations and needs.
Risk-bearing ability
Uncertainty is a common characteristic of the stock market. If you wish to invest in the Indian stock market, you must have your risk tolerance mapped out. Ask yourself a few key questions: Are you ready to shoulder more risk for potentially higher returns? Or do you prefer stable but lower returns with a lower risk exposure? Consider your existing financial cushions like your emergency fund, savings, and risk-free FD and RD investments.
Align your investment choices with your risk appetite. In other words, choose stocks that best meet your risk levels. For instance, if you are a low-risk investor looking to invest in the Indian stock market, you can choose defensive and dividend stocks. If you are a medium-risk investor, you can opt for mid-cap stocks and index funds. Alternatively, you can invest in small-cap and growth stocks if you have a high-risk appetite. Remember that an accurate risk measurement can help you curate a portfolio that best reflects your needs.
Diversification
Ideally, you would want to spread your investment across stocks of different companies and sectors since it helps mitigate risks. Even if one company or sector performs poorly, chances are that others may be performing better. This will allow your investment portfolio to keep growing. Apart from diversifying your investments in the Indian stock market, you should also diversify your overall investment. In other words, you should spread your investments beyond stocks to include other asset classes like bonds, mutual funds, ETFs, gold, and real estate.
Understand the taxation policies
Before you invest in the Indian stock market, learn about the tax treatment of your returns. In India, capital gains tax is levied on profits accruing from sales of stocks. Two types of capital gains taxes are applicable in India based on the holding duration of the stock. Short-term capital gains tax is charged at a rate of 15% if you make a profit from the sale of equity stocks before completing one year of holding. Alternatively, if you sell equity stock after 1 year of holding and the profits accrued cross the 1 Lakh mark, a 10% long-term capital gains tax is applicable. Moreover, since taxation laws are frequently revised, you should always remain up-to-date with the latest amendments.
Conclusion
In summation, to invest in the Indian stock market, you must first open a Demat and trading account with a brokerage firm of your choosing. Once you have a Demat account, you can start investing - not just in shares or different listed financial securities. You should carefully consider factors like investment objectives, risk appetite, diversification, and taxation to curate a good portfolio and invest for the best returns.
