If you’ve ever heard or seen people discussing investments and the stock markets, you must have wondered about how this works, and how to invest money in stocks. Usually, the entire stock market industry seems so complicated, and the risks seem so high we don’t even bother to start learning how to make money in stocks. It seems like a better idea to not start, than to start and risk everything.
Here is the breakdown of the concepts behind the functioning of the stock market and an explanation on a grassroots level. By the end of this article, you will have a basic idea as to how to invest money in share market.
What Are Shares?
A company needs funds for expansion or other reasons. If the company does not have enough funding and resources, the company has to look for alternative methods of meeting its financial needs. It might take a loan from a bank, but it will have to pay hefty interest on the amount later.
Another option is to add partners to the company, who can together fund the capital needed. In exchange for money, they will get a percentage of the profit the company makes. The company issues shares for this purpose. Anyone who buys some shares becomes a partner in the company, and he will get a part of the profits as per his contribution. The amount of shares a person buys decides the percentage of holding he has in the company.
For example, if someone buys shares worth Rs 1 lakh, and the total value of all the shares offered by the company is Rs 20 lakh, then he would be a 5% partner in the company.
What Happens In The Stock Market?
A person who has a part of the ownership of a company’s shares can sell them to another person. A stock market is a place where investors can buy and sell any shares that are listed for the stock exchange offer. The question that now springs up is how to earn money from share market. Let us assume you bought 80 shares in a company, each worth Rs 1000. Total investment done by you would be Rs 80,000. Now, if after some time, the value of shares increases to Rs 1200 each, you can sell the all or a part of your shares. Let us assume that you decide to sell all 80 shares. You will get an amount of Rs 96,000. Since you have only invested RS 80,000, you get a profit of Rs 16,000.
What Documents Are Needed?
Another question that people often ask is how to invest money in share market. How do you start? There are a few things you need to have to start investing:
- PAN Card
- Demat Account
- Aadhaar Card or any other valid address proof
- A cancelled cheque, or your passbook
- Passport-sized photos
What Are The Things To Keep In Mind Before Investing?
Now that you know how to make money in stocks, you might be eager to start investing soon.
1. Clear Your Loans And Debts First
If you have any loans that are remaining to be paid back, you should pay them back first before you start investing. This is because any profits you make from stocks will be used for repaying it, and you will have negligible profits to show for your hard work. Clearing your debts may take a while, but you need to be patient. You can use this time to do some research on your own and learn how to make money in the stock market for beginners.
2. Only Use The Extra Money For Investing
You need to invest only the extra amount you have in stocks. In other words, your investments shouldn’t interfere in your ability to pay for rent, groceries, or tuition fees. Prioritize the essentials and then use the money left over to invest.
3. Save A Little For Emergencies
You should not spend all the extra money you have in stocks and shares. Keep a small part of your income as savings, so that you don’t lack money in case you need to make some unforeseen expenditure. This includes emergencies like physical illnesses, impromptu and emergency travel plans, or backup finances if you lose your source of income.
What Are The Steps Taken To Ensure A Secure Investment?
If you diligently consider all the above points, you might not end up with much free money to invest. Even if you feel you don’t have enough money, you can still play in the stock market. You need to keep the following points in mind to learn how to invest in stocks for beginners with little money.
1. Set A Goal
Having a rough idea of a goal beforehand allows you to plan your actions accordingly. Your goals should be based on your financial needs, how much risk can you withstand, and how much money you have to invest. This will also help you decide the amount of time you need to stay invested to fulfil your goals.
2. Understand The Company You’re Investing In Thoroughly
Before you make the choice, you need to determine which companies would be suitable for you. Invest in companies that have a high chance of remaining profitable even in times of economic crisis. The finances of the company should be strong enough to withstand any turbulence in the stock market. Investment takes 7-10 years to yield good results, so you should look for long term gains rather than short term fulfilment of your needs.
3. Reduce Risks By Diversifying
“Do not out all your eggs in one basket.” You should keep investing in different commercial sectors and places to reduce the risks. Stock markets are highly volatile. If you have only invested in one sector, say banking, and it goes down, then you will suffer from major losses. Investing in different sectors that are not interrelated can reduce this risk.
4. Decide The Kind Of Broker You Want
Brokers are the middlemen between investors and securities exchange.
|Full Service/ Traditional Brokers
|Discount/ Budget Brokers
|Type of Service
|They provide comprehensive planning advice about the shares and stocks according to your need. They do all the research, planning, and provide every trading facility.
|They act as mere intermediaries and only provide trading facilities. They do not provide any advice.
|They generally charge 0.3 to 0.7% of your profits. These can be very expensive.
|They charge only a nominal fee, around INR 20 per trade.
|These have a very extensive network in the stock market.
|They do not operate with a large network.
|They provide both online and face-to-face services.
|Their services are only available online.
|Such brokers are suitable for those who require guidance and planning regarding their investments.
|These are suitable for people who prefer to do their research by themselves and decide e which stocks they want to buy.
Your choice of brokers depends on your needs and your goals. If you can do your research and be sure about your decisions, budget brokers would be the way to go as they charge very fewer fees. However, if you’re investing a huge sum of money, it would be wise to get a second opinion and you can go for full-service brokers.
5. Keep A Plan If You Need To Exit
Usually, you should not sell your shares and investments before you have reached your goal, unless necessary. You might want to sell shares if you find better investment opportunities, or if you badly need money, or if the risks associated with the stocks have increased more than what you are comfortable with. In such a case, you should have a plan already ready, and you should know all your exit options.
- Before investing, research the company or the market and set an aim
- Look into the rice to earnings ratio, compare the current share price with the per-share earning
- Analyse the company’s or market’s stocks and how they have performed over the last 5 years at least before investing
- Diversification of money across different investments reduces risk
- Before positioning your money in the market look for high dividend stocks
- Follow simple guidelines and cues and not indulge in complex terminologies and concepts
By now, you have a clear idea as to how to earn money from the share market, and how to invest money in share market for beginners. The most important thing before buying any shares is to research all your options, and not rush into any decisions. You should keep your eye on the long term goals, and make choices only after contemplating it thoroughly. Stocks and investments bear fruit in the long run, so don’t lose your patience if you do not make a large amount of money from the start. Remember, the two keys to successful investing are patience and strategy.