For those who have never tried it before, the share market can seem a large, scary place, a daunting experience to undertake. But the fact is that with interest rates at historic lows and pressure on the Reserve Bank to cut them further, it is impossible to avoid equity investment if you want your money to work for you. And really, a stock exchange is little different from any other market – it is a place to buy and sell shares of companies, much as you would any other commodity.
In India, there are two major stock exchanges, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). There are two major indices that are used to track stock prices, which are the BSE Sensitive Index (a weighted average of thirty major companies’ stock prices) and the NSE – Fifty, or Nifty (a similar index of fifty major companies).
Unlike cash, which is considered risk-free, and bank fixed deposits (which are very low-risk investments), equity investments are risky in nature. The returns are correspondingly higher, with the Nifty showing a three-year return of 56% and an average return of 40% per annum over the last twenty years. Of course, as good as these numbers look, they depend on market cycles and are subject to vast fluctuations.
So what do you need to find your way around the stock markets in India? Let’s try to go over this step-by-step:
1. Get a Permanent Account Number (PAN)
Without the PAN from the income tax department, you will not be able to access the stock market at all.
2. Open a Bank account
All transactions on the stock market now happen through Bank accounts. So you need to have an account with a scheduled bank.
3. Get a broker and trading account
Unlike other markets, shares cannot be bought and sold directly by individuals, the access to trading on the BSE and NSE has to be done through brokers. Brokers can be both online and offline, and they charge a commission on each trade. If you know a reliable broker through some family or friend, that should work well. If not, do not simply go for one who charges the least, since brokers have access to a portion of your funds. Try to research well before opening a broking account. Generally speaking, broking houses backed by Banks are a safe option. You can also opt for online broking that is now offered by companies including ICICI Direct and ShareKhan, among others.
4. Open a Demat account
There is one last – and critically important step to be taken. Physical trading of shares in paper form is virtually extinct. Shares are held in special accounts known as demat (short for de-materialised) accounts. Like we keep money in Bank accounts, shares are held in demat accounts, where the company with which you have the account keep the record of shares bought and sold by you. Typically the broker will help you with all this.
5. Give instructions
Actual trading happens through instructions. If you have an offline broker, you would be instructing your relationship manager regarding how many shares you wish to buy or sell and at what price, for which company. If you trade online, you will have to enter the instructions yourself.
Now you have all the tools for trading, what are the other things you need to be aware of?
1. Trade with care: We have already covered this, but it is worth re-emphasizing. Share trading is risky. Avoid investing in unheard-of companies based on nothing more than ‘tips’. Let there be a solid study of financial fundamentals behind your investment decisions
2. You can give complex instructions: These include stop-loss, limit pricing and so on. This means that you can, in a limited way, structure your buy and sell instructions by stating a minimum or maximum price that needs to be reached before selling or buying.
3. There are charges every step of the way: Apart from transactions, the demat account and trading account will often have an annual charge for using their services.
4. You can invest on margins: It is possible to increase your profits by indulging in day trading, where you buy and sell a stock on the same day and leverage your profits and losses further. This is an advanced form of trading however, and not recommended for beginners
Equity trading is not for everyone, but it can prove to be the difference between poor and good returns from investments. So it is in the interest of every person to try and learn as much as he or she can about equity trading, and hopefully we have provided you a Launchpad to do that!