Welcome to my beginner’s guide to investing in the Indian stock market. Investing in the stock market can be a great way to build wealth over the long term, but it can also be a bit intimidating for those who are new to it. That’s why I’ve put together this guide to help you get started.
In this post, I’ll cover the basics of what the stock market is, how it works, and why you might want to consider investing in it. I’ll also walk you through the different types of stocks you can buy, the different ways you can invest in the stock market, and some tips to help you make informed investment decisions.
I’ll also provide some insight into the potential risk and return trade-off you should keep in mind and the importance of diversification in your portfolio. It’s important to understand that investing in the stock market should be done as a part of a long-term plan and not for short-term gain.
So whether you’re just starting to think about investing in the stock market or you’re ready to start buying shares, this guide will provide you with the information you need to get started.
So, let’s dive in!!
- I. What is a stock or share?
- II. What is a stock exchange or stock market?
- III. Why should I invest in stock or shares
- IV. How I can start Investing in the stock market or What tools do I need to invest in the share market?
- V. What is fundamental analysis?
- VI. What Is Technical Analysis
- Final words
I. What is a stock or share?
What exactly is a stock or a share anyway? Understanding this begins your investing journey.
I first came across the term stock or share or equity in my accounts subject when I was in class 12.
By the way,
A stock, also known as a share or equity, represents a unit of ownership in a publicly traded company. A publicly traded company is a company that is listed on a stock exchange. This means that the company’s ownership is divided into shares that can be bought and sold by members of the public like you.
You can invest in a publicly traded company by buying its share from a stock market or share market.
When You buy 100 shares of TCS, you become a partial owner of the company. You become a “shareholder.” If you had enough cash, you could simply buy up every share of TCS, and then you would become the owner of TCS.
Now let’s move further to get some ideas about the stock market.
II. What is a stock exchange or stock market?
The stock market is the greatest opportunity machine ever created.
The basic need of stock Markets is to raise and fund capital for the operations of a company. By these, companies raise the money they require and investors get profit on the stocks they hold. It’s a win-win situation for both entities. That’s why the stock market is very popular and it’s going even more popular day after day.
There is a place for everyone and every strategy in the stock market. You can invest in stocks, holding them for many years and pocketing their dividends. You can also trade stocks. You can day trade them, swing trade them, or short them (bet that a stock is going to go down instead of up). Don’t ever let anyone tell you what you can or cannot do with stocks.
You may even come up with your own original way of profiting by investing in the stock market that no one has ever used before.
A stock exchange can be compared to a marketplace. Just as a physical marketplace is a place where people gather to buy and sell goods, a stock exchange is a marketplace where people buy and sell shares of publicly traded companies.
A stock exchange or stock market is a place where different publicly traded companies come to sell their stocks/shares to investors and traders, just like a farmer’s market where different farmers gather to sell their products, like fruits, veggies, eggs, etc.
In India, the major stock exchanges are the National stock exchange(NSE) and the Bombay stock exchange (BSE). You don’t have to visit the stock market or exchange for buying and selling stocks or shares. Nowadays, You can do this with your mobile phone easily!
“A stock market is a place for investors to buy shares of companies they believe will do well in the future, and for companies to raise money to grow and expand their business.“
III. Why should I invest in stock or shares
You should pat yourself first that this question on investing came to your mind!
We normally keep our money in savings accounts or FDs, hoping that we are getting a decent return. But that is not the case. All savings bank accounts and most FDs give returns far less than the rate of inflation. Hence the higher rate of inflation slowly eats away the value of your money.
When you invest in really good value stocks or shares, in the long run, you will get much much higher returns than savings bank accounts of FDs.
Hence you get inflation protection when you invest in good stocks. Besides this, three other most important benefits of investing in shares are:
- Potential for long-term wealth: Investing in stocks over a long period of time can potentially provide a path to long-term wealth creation.
- Opportunity to participate in company ownership: When you buy a stock, you own a small piece of the company, and as the company grows, the value of your stock can increase.
- Potential for dividends: Some companies pay dividends to shareholders, providing a regular stream of income for investors.
Also, When you start investing in the share market, you began to understand how the market economy functions and its different connections. This enhances your knowledge and makes you a better-informed person.
So far so good!
Now, You might be thinking that how you can enter the stock market and start investing. I am very much happy to help you!.
IV. How I can start Investing in the stock market or What tools do I need to invest in the share market?
Now as you are interested to enter the stock market and start investing, you need a Trading account and a Demat account to trade in stocks or shares and store them until you sell them.
Most public, and private banks and some brokers provide trading accounts. When you open a trading account a Demat account is also created at the same time.
But, before opening a trading account, you must have a bank account with you with mobile banking or internet banking activated.
Then, you will link your bank account with the trading account to transfer the funds for buying shares of the companies.
For opening a trading and Demat account you will need to have the following documents beforehand for your KYC:
- PAN card
- Aadhaar card
- Address proof
- Passport size photo
- Your scanned signature
After linking your bank account and trading account, you are now rocket ready to buy your first share.
Now, you are thinking about how should I choose or decide on your first investment in the stock market. This you can do in two ways,
The first is to buy your first stock on the advice of someone else like a YouTuber or your friend, which I do not suggest. As I suffered a great loss when I invested in YESBANK on the advice of a YouTuber. I purchased the shares when the price of YES BANK single share was Rs 1500 now YESBANK share is trading at Rs 19.85 a piece here in 2023.
Hence, you should not buy any share on impulse or gut feeling. Neither should you buy any penny stock just for learning or experience the stock market.
When choosing a stock, it’s important to consider several factors, including the company’s financial health, management team, and industry trends. Additionally, you should also consider your own investment goals and risk tolerance. High-quality stocks tend to have strong fundamentals, such as steady revenue and earnings growth, and a history of paying dividends. It’s also a good idea to diversify your portfolio by investing in a mix of different types of stocks and sectors.
Now, as you are ready to invest in the stock market, you must know how to weigh different stocks. If you choose a company without understanding it, you may lose your money and confidence in the share market.
And to understand a company you have to do a Fundamental analysis and Technical analysis of its business.
V. What is fundamental analysis?
Fundamental analysis is the process of evaluating a company’s financial and economic condition to determine its intrinsic value, a term meaning what you believe a stock is really worth – as opposed to the value at which it is being traded in the marketplace and thus make informed investment decisions. If you are entering the stock market for long-term investment, then you got to have a strong hold on the art of fundamental analysis.
By having fundamental analysis one can have an idea of the businesses and their future. If a company is called fundamentally strong or sound that means its share price may go higher and vice versa.
There are three main documents or financial statements that you need to read and analyze to determine the soundness of the company:
I will explain the above three important documents of the company’s fundamental analysis in a separate article. As of now, have a brief idea about some key tools of fundamental analysis.
Earnings Per Share (EPS)
Investors use EPS to compare one company to other. To calculate earnings per share we use the following formula,
Earnings per share or EPS = Net Earnings/Outstanding Shares
Company A had earnings of Rs. 100 and 10 shares outstanding, which equals an EPS of 10 (100 / 10 = 10).
Company B had earnings of 100 Rs. and 50 shares outstanding, which equals an EPS of 2 (100 / 50 = 2).
In the above case, Company A is better than Company B in terms of EPS. But don’t assume that the shares of Company A are good to buy as there are many factors to be taken into consideration before investing.
The EPS is helpful in comparing one company to another, assuming they are in the same industry.
Now, let’s move on to our next tool of fundamental analysis.
Price To Earnings Ratio P/E Ratio
When you divide the market value of a share by earnings per share you get the P/E ratio.
The P/E ratio = Market value per share/Earnings per share
A high PE ratio tells us that the price of a stock is high relative to earnings. In contrast, a low PE ratio tells us that the price of a stock is low relative to earnings.
let’s say Company XYZ has a current stock price of Rs 50 and an EPS of Rs 5. The P/E ratio for Company XYZ would be:
P/E = Rs 50 / Rs 5 = 10
This means that investors are willing to pay Rs 10 for every Rs 1 of earnings generated by the company. A lower P/E ratio can indicate that a stock is undervalued, while a higher P/E ratio can indicate that a stock is overvalued. It’s important to note that the P/E ratio should be compared across companies in the same industry, as it can vary widely across different sectors.
A high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E.
A low P/E indicates that:
Either the company is undervalued Or the company is doing very well relative to its past trends.
When a company has no earnings or is posting losses, in both cases P/E will be expressed as “N/A.”
The Price/Earnings to Growth ratio (or PEG ratio)
It is the modified version of the P/E ratio as it also takes into account. We can say that the PEG ratio is the advanced or improved version of the P/E ratio for a more fundamental analysis of a stock in relation to its future earning potential.
By calculating the PEG ratio we can determine whether the company or the stock is undervalued or overvalued.
The formula for the PEG ratio is,
Price/earnings-to-growth = (Market price of stocks per share/EPS) / Earnings per share growth rate
Let’s understand the PEG ratio with an example,
suppose, Company A recorded earnings worth Rs.10 lakh in FY 22 – 23. The market price of its share at that time was Rs.10, and it had a total of 160,000 outstanding shares. Its EPS witnessed a 2% growth over the last year and is projected to grow by 2.5% for the next year.
its EPS, as per the records of FY 22 – 23, is Rs. 6.25 (10,00000 / 160000).
P/E ratio = 10 / 6.25 = 1.6
Hence, PEG ratio = 1.6 / 2.5 = 0.64
If the PEG ratio is less than 1 then the stock is undervalued and if the PEG ratio is more than 1 then the stock is overvalued.
Dividend Payout Ratio
A dividend is a portion of the company’s earnings and is distributed or paid to the shareholders of the company.
If you have 100 shares of TATA Power and it announces Rs 3 dividend, then you will get 100*3 = Rs 300 as a dividend.
However, the dividend payout ratio is the number of dividends paid to stockholders relative to the amount of total net income of a company.
Dividend Payout Ratio = Dividend Per Share / Earnings Per Share
Suppose a company made Rs 20,000 in earnings after tax. As the company paid Rs 10,000 in dividends to shareholders, its dividend payout ratio is:
(Rs 10,000 / Rs 20,000) x 100 = 50%
This can also be calculated on a per-share basis by dividing dividends paid by the number of shares issued:
Rs 10,000 / 100000 = 10 paise per share, here 100000 is the number of shares issued.
Normally 55%-75% are considered high.
Aren’t you interested in getting returns from the investments that you have made? Of course, you are! And dividend yield measures how much you are getting from dividends.
The dividend yield is the financial ratio that measures the amount of dividend paid to the shareholders relative to the market value per share.
Dividend Yield = Annual Dividends Per Share / Per Share Price
Company’ A share is trading at Rs 50 and is paying a dividend of Rs 5 per year, then its dividend yield is,
Rs 5/Rs 50 = o.1 or 10%.
Now, let’s suppose Company’s B share is trading at Rs 25 and is also paying a dividend of Rs 5 per share, then its dividend yield will be,
Rs 5/Rs 25 = 0.2 or 20%.
Clearly, company B is better than company A in terms of dividend yield.
Price To Sales – P/S
Price To Sales – P/S is a valuation ratio that compares a company’s stock price to its revenues.
P/S = Market Capitalization / 12-Month Revenue
Market capitalization is the number of shares outstanding multiplied by the current share price.
As you see in the above formula, P/S does not consider the company’s earnings.
Therefore, it is not a good indicator of profitable the company is or whether the company will become profitable in the near future.P/S ratio is useful to analyze newer companies or companies in the growth phase.
A company’s balance sheet provides information about its assets and liabilities. And book value is the net asset value of a company. Book value is total assets minus intangible assets(patents, goodwill) and liabilities.
The formula for book value is:
Book Value = Total Assets – Total Liabilities
Book value is used to calculate various financial ratios and metrics, such as the price-to-book ratio (P/B ratio). It is considered a measure of a company’s intrinsic value, as it reflects the value of the assets a company owns and the liabilities it owes, regardless of market conditions.
Return On Equity
Wouldn’t you want to understand the level of profitability of the funds you have invested in a company?
Return on equity then does your work. It measures the profitability of the company.
To be more specific,
Return on Equity (ROE) is a financial ratio that measures a company’s profitability by calculating how much profit is generated with the money shareholders have invested.
The formula to calculate ROE is,
ROE = Net Income / Shareholder’s Equity
Net income is the company’s profit, which can be found on the income statement. Shareholder’s equity, also known as stockholders’ equity, is the amount of money that would be returned to shareholders if all of the assets were liquidated or converted into cash and all of the liabilities were paid off. This can be found on the balance sheet.
A higher ROE percentage typically indicates that a company is more profitable and generates more profit for each Rupee of shareholder’s equity.
Now, let’s have some idea about the market-driven analysis of a company’s share. It is called Technical analysis
VI. What Is Technical Analysis
Technical analysis is the study of the supply and demand of a share(stock) or the market as a whole to understand the mood of the stock market. Share or stock traders(short-term traders) mostly make use of technical analysis.
In technical analysis, we analyze the stock price in terms of statistical analysis of the market activity in terms of price and volume. Volume is the number of shares traded over a given period of time.
Investors use chart patterns, indicators, and oscillators as tools for technical analysis. By making use of these tools investors or stock traders try to predict the price or price trend of s stock
Technical analysis is not foolproof or absolute. There is always risk involved in deviations from the normal trend of a stock or share.
Investors always keep in mind the following basic assumptions of technical analysis:
Market discounts everything
Here “everything” means all that affects a stock price.
“Market discounts everything” means that the stock market takes into account all available information and predicts future events, such as a company’s earnings when determining the value of a stock. This means that even if something good happens in the future, like a new product launch, good news or bad news about the company.
Price moves in trends
Here “price” means the price of the stock in you are analyzing.
The price of a stock most of the time follows a price trend. Sometimes the price keeps on moving up which is called an upward trend. And sometimes it goes down and down, a downward trend. Price trends help us to decide when to buy and sell the stock.
History tends to repeat itself
The nature of the market is repetitive in nature and can be predicted.
Technical analysis is understanding the psychology of the market. And the Repetitive nature of the marketplace is clearly shown by specific chart patterns. Therefore it is important to pay attention to the history of the stock market, to get about what might happen in the future. Most of the time it is human psychology that is at play.
But it’s also important to remember that the stock market is always changing and that nothing is guaranteed.
If you have read so far then you know that the price of a stock moves up and down. Support is the point that prevents the price from declining further. Support is the point from where the price of the stock bounces back or moves up.
The support level of the stock price is always below the current market price (CMP) of the stock. It is a good practice to buy a stock when its price is at a support level as you will get the stock below the market price.
In the above chart of a company’s stock price trend, it can be clearly seen that at around Rs 300 prices, the stock price has bounced back twice. Therefore it is a support point or level.
If support is the floor of a stock price then Resistance is the ceiling of the stock price.
Or we can say that,
Resistance is the price at which the price stops from further rising. The resistance level is always above the market price. That means the resistance level or the resistance point is the highest price of the stock in a certain amount of time.
In other words,
At the resistance point or level, more people are selling the stock and fewer people are interested to buy the stock at current prices, i,e in marketing terms, supply is greater than demand.
Yes, you are correct, Rs 570 is the resistance level!
The question arises where do we use the support and resistance level more often?
Here is the answer,
Support and resistance level are used in trading stock. When the support is confirmed we buy the stock and on resistance, we sell the stock.
As the name suggests indicators indicate something. And stock market indicators are the quantitative tools that indicate future market movements of a stock.
Indicators are short of tools that are used by traders to determine their entry and exit points in a stock trade.
Market indicators are comprised of formulas and ratios that provide a secondary measure to actual price movements that will help you confirm the quality of the chart.
There are many market indicators covering all of them will not help the idea of this article. Therefore, I will cover a few of them to get you started.
No single market Indicators will provide you with the complete picture, you must learn the important ones first and with practice can use combinations of indicators.
Now, let’s get some idea about Indicators,
The moving average is the average price of a stock for a certain period of time.
Price is the key factor that helps a trader whether a trade is profitable or not. And moving averages helps a trader to understand price movement over a period of time. Moving averages are expressed as a single-flowing line.
You can see 10 Day (Upper line) and 21 Day (Lower Line) Moving Averages on the chart.
It is important to understand that moving averages do not show future price movements. They only show the real price movements that have already occurred.
Relative strength indicator (RSI)
RSI or relative strength indicator measures the speed and change of price movements.
You can clearly see the RSI line below.
The value of the RSI oscillates between 0 to 100 depending on the general market trends.
- In the Bull market or uptrend – RSI is in the range of 40-90
- In the Bear market or downtrend – RSI is in the range of 10 – 60
I must finish this article here hoping that you must have got some value from my side to get you started in stock market investing. Your query related to “How to invest in the Indian stock market” may be resolved now. This article is not a static post as I will keep updating it with new facts and knowledge and will try to make this page or post or article as fresh and valuable as possible.
Investing in the stock market is not rocket science provided you have done your homework of good research. You should never invest in stocks on the advice of someone else blindly. You being an absolute beginner, must start small and learn the market before making big leaps.
With patience, discipline, and a bit of knowledge you can become a successful stock market investor.