Investing in the share market is a great way to generate wealth.
Yes, there’s volatility associated with investing in the share market. However, to reach your financial goals, you need to take some amount of risk.
In this guide, I’ll help you get started quickly.
But before that, a quick word on the many investment options available to you.
What Asset Are You Buying?
The most straightforward concept in the share market is equities.
You can buy the shares of a company at a price decided by the market. You can hold on to the shares for as long as you want.
When you decide that you want to cash out, you can sell the shares at the current market price.
The difference between the buying and the selling price is your gains/loss.
However, in the share market, you have more sophisticated options.
Note: This guide covers investing in shares. This is the recommended option for beginners.
Derivatives Trading – Futures, Options, Puts, and Calls
Derivates by themselves do not have any value. The value is derived from the underlying assets.
E.g., derivatives of HDFC will be linked to the stock price of HDFC.
You will keep hearing jargon like Futures, Options, Puts, Calls, Forwards, etc. If you are a beginner investor, ignore them. That’s not a battle you are ready to fight today.
Warning: While the opportunity to make money through derivatives is higher, you also stand to lose a lot more than you invested – thanks to margin trading.
How to Invest in Share Market in India?
There are two paths you can take to invest in the share market.
Path #1: For Beginners – Invest Through Equity Mutual Funds
Less than 5% of Indians invest in the share market.
It’s mostly because:
- No guarantee of returns
- High volatility
- Inability to pick stocks
- Additional investment required – DEMAT, Brokerage Fee, etc.
It’s not easy.
Stock picking is 50% luck and 50% skill. If it were pure science, most people would never lose money. Even famed investors lose billions of dollars in the share market game.
So how do you overcome these odds and invest in equities in India?
Choose equity mutual funds.
Guide Alert: Use my step-by-step guide to get started with investing in mutual funds in India.
What Are Equity Mutual Funds?
An equity mutual fund is a collection of stocks (65% minimum), bonds, and cash.
For a small fee, the fund manager offers professional management of your money.
There are broadly two types of funds:
|Active||The fund manager actively makes asset allocation decisions||1.5% – 2.5%|
|Passive/Index||Tracks a particular index like NIFTY 50 or NIFTY NEXT 50||0.1% – 0.5%|
Here’s what a typical active fund manager does for you:
- Pick the stocks based on the investment objective of the mutual fund
- Diversify your investment across multiple stocks to reduce risk
- Manage allocation depending on the market conditions
- Provides liquidity when you want to withdraw
Here’s what a passive/index fund manager does for you:
- Closely track the index and invest in stocks that mirror the index. Any deviation is captured as tracking error
- Diversify your investments. This is limited to the extent the index is diversified
- Provide liquidity when you want to withdraw
Equity mutual funds are my recommended way of investing in equities – both for beginners and experienced investors.
Pro Tip: If this is the first time you are investing, consider ELSS mutual funds. ELSS investments are covered under 80C for tax saving. You can participate in the share markets while saving tax. If your 80C is covered, consider index funds.
Path #2: For Experienced Investors – Invest Directly Through Stock Brokers
If you want more control over the stocks you hold, you’ll need to go direct.
Step #1: Choose a Broker
To invest in the share market, you’ll need to go through a registered broker. In India, there are several brokers.
Broadly, there are two types of brokers:
|Type||Offerings||Charges (Equity Delivery)|
|Full Service||Trading Platform + Advisory||0.3% – 0.9%|
|Discount||Trading Platform Only||Typically Free|
My broker of choice is Zerodha – a leading discount broker in India.
However, if you want advisory, go with ICICI Direct, HDFC Securities, or ShareKhan.
- Zero fees for equity delivery
- Invest in stocks as well as mutual funds with one account
- Large broker with more than 20 lakh clients
- Invest in bonds and govt. securities
- Fairly stable platform
Open a Zerodha account 100% online by clicking here.
What do you need to open an account with Zerodha?
- Aadhaar Number
- Canceled Cheque/ Bank Statement
- Your Photo – Digital copy
- Your Signature- On a white piece of paper
- Income Proof – If you plan to trade in futures & options
Step #2: Invest in The Right Stocks
If I knew how to pick the right stocks, I’d be a billionaire right now. So would the rest of the world.
The truth is that there is no proven system to pick winning stocks. Anyone who claims to know how to pick winning stocks all the time is either lying or delusional.
But still, crores of people invest directly in stocks.
There are various approaches to selecting stocks – value investing, momentum, risk parity, etc.
Your goal should be to invest in companies in a field where you have some level of expertise – commonly referred to as the circle of competence.
Once you identify a comfortable method to pick stocks, use your brokerage account to keep investing.
Pro Tip: Need help with picking stocks? Consider Smallcase if you are not sure which stocks to pick. Smallcase is a collection of stocks based on an idea. They also integrate with Zerodha and other leading brokers.
Step #3: Review and Rebalance
Investing in the share market is the first step.
However, you need to review your investments regularly and make sure you rebalance them if required.
If you are a long-term investor, review your investments once a year.