You wish to test the stock market waters. You are haunted by prolonged indecision and self-doubt. You are intimidated by the complexities in the markets. Does this resemble you? Peter Lynch, the legendary stock investor, has some re-assuring words: 'Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.' If you are willing to put in the time and effort, stock market investing can be a rewarding experience.
According to Sandip Sabharwal, Investment Adviser, new entrants into the stock markets can take two routes. They can either go with established equity mutual fund schemes or buy bluechip stocks in a staggered manner, for example, if they want to deploy Rs one lakh they can buy 10 bluechips for Rs 10,000 each and keep buying them periodically. In case they want to take a greater risk and invest in a broader portfolio, its best to rely on professional advice. Stock market investing is not a monthly income plan and one should be prepared for a 10-15% downside in case of particular events, he added.
Here is How to Wade into the World of Stock Investing
"The journey of a thousand miles begins with the first step," said the Chinese philosopher Lao-Tzu. The sooner you take the first step in your investing journey, the richer you will get. Starting early gives money more time to get compounded as compounding is most successful over a period of time. For example, a person who starts investing at the age of 25 and invests till the retirement age of 60 would have invested for 35 years, whereas someone who starts at 30 would be invested for only 30 years.
Open Investing Account
You need a trading/brokerage account and a demat account (short for 'dematerialized account') to start investing in the stock market. The trading account facilitates the purchase and sale of shares listed on the NSE and BSE, while the demat account holds the purchased shares in an electronic format. There are many brokerages and banks providing brokerage and demat services today. The accounts come in two variants, viz. offline and online. In an offline account, the share purchase and sell orders are placed with the broker over the phone. Online accounts are becoming popular as you can place the orders yourself (with a login ID and password) with a mere click of the button.
"Great things are not done by impulse, but by a series of small things brought together," said the great post-impressionist painter, Vincent Van Gogh. Start putting in a small amount of money and before you know it, you would accumulate a decent corpus under your belt. Moreover, it is better to commit smaller sums of money during the initial learning process and increase the allocation with experience and time.
Have a Plan
A newbie investor will face the inevitable question: what to invest and when to invest? The basic dictum of investing is to buy low and sell higher. A sound strategy tells you what to buy, and when to buy and sell; and learning fundamental analysis and technical analysis will help in making such decisions. Fundamental analysis evaluates shares by looking at a company's parameters such as business model, balance sheet and quality of management, while technical analysis studies a stock's historical price and volume to make future projections. Reading investing classics such as 'One Up on Wall Street' by Peter Lynch and 'The Intelligent Investor' by Benjamin Graham would also go a long way in honing investing skills. A good idea is to invest in companies that you are already familiar with and subsequently look at other companies and sectors.
Decide on the Time Horizon
Investors have different time horizons for holding shares. Intra-day players trade in the market with the aim of exiting their positions by the end of the day, short-term participants have a time-horizon from a day to a year, while long-term investors look at a minimum of one year and longer. The advantage of long-term investing is that you have to choose a great company at a reasonable price and allow its share price to rise over time. Determining one's time horizon is absolutely essential before taking a plunge into the markets.
Decide on Market Type
New investors should have clarity on whether they wish to invest in the primary market or in the secondary market. In the primary market, companies issue shares through an initial public offering (IPO) from time to time to raise funds for their capital expenses. The IPO investors buy shares directly from the company with the hope of getting shares at reasonable valuations and making good returns post the listing on bourses. In the secondary market, the listed shares are bought and sold by the investing community. Some investors may invest in primary issues alone due to the lower pre-IPO prices, whereas others may prefer the broader secondary markets.
At the end of the day, investing should be based on sound strategy, realistic expectations, loads of discipline and sound money management skills.