You are now familiar with the various stock valuation methodologies and can identify the over-valued or under-valued stocks with precision. But the next step is how do you go about investing in stocks in India.&lt Now before we can answer this question, it is important to talk about the two approaches to stock investments.

Types of Investing

Wealth appreciation is the shared goal for all investors. However, the routes to this common destination may vary. Broadly speaking, there are two ways of investing – trading and value investing.

Trading is about frequent stock transactions (buying or selling) over a short period of time. The objective is to earn quick returns with a focus on stock prices. Investors who adopt this approach (also referred to as traders) jump into and out of investments within a short span of time (sometimes within minutes) with the goal of short-term profits. They often focus more on the stock’s technical features instead of the company’s fundamentals or long-run prospects. They are only concerned with the direction of movement. For individual investors, trading can be extremely dangerous due to the excessive volatility associated with the stock markets. You need to have a clear investment strategy, be proficient with technical analysis to predict the future price movement and fast enough to take decisions (buy or sell).

This brings us to the second type of investing – Value Investing. This concept was popularized for the masses by none other than Mr. Warren Buffett. He is not a believer in the concept of short-term profits. In fact, he is of the opinion that if you are not ready to own a stock for ten years, you should not bother owing it for even ten minutes! Value investing is a long-term investing technique. Value investors identify stocks whose intrinsic value is significantly higher than their current market value and invest in them. The rationale being that in the long run, the market will correct its inefficiencies and the stock will get valued at the correct level. So, basically buy low, hold the stock and sell high. The biggest advantage of this methodology is that you remain unfazed by the regular stock market fluctuations and benefit from the power of compounding! No wonder, Mr Buffett could grow his empire from a mere 6000 USD to 7320 Crore USD in less than seven decades.

Moral of the story – it is better to stick for the long run. Treat it as a test match rather than as T-20 match.

How to invest in stocks in India?

Indian investors can trade on two stock markets

  • National Stock Exchange or NSE
  • Bombay Stock Exchange or BSE

 

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There are 5 important terms which you should be familiar with before you invest in stocks in India.

1)Depositories

It refers to an entity which holds our financial investments in an electronic or dematerialized form. Depositories take the responsibility of maintaining ownership or transaction related records of all the investors. In India, there are two depositories – NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).

2) Depository Participants

Depository Participants or DPs are the intermediaries who facilitate the transactions between you (the investors) and the depositary. They charge brokerage for their services.

3) Demat Account

This account holds all your stocks in dematerialized form. In simple terms, it helps to convert paper or physical forms into an electronic one. You need to have a Demat account to participate in the stock market. Think of this account as you bank passbook. It will have details of all your transactions albeit in the stock world.

If you want to open a Demat account, you will need to reach out to a registered DP and complete the formalities (application form, identity proof, address proof, etc.)

4) Trading Account

Your trading orders need to be initiated through the trading account. You can reach to any registered broker (or entity) for completing the formalities associated with this account. The supporting documents required for a trading account are similar to that of a Demat account. Once you open a trading account, you get a unique trading ID which can be used for all trading (buy as well as sell) related transactions.

5) UIN (Unique Identification Number)

Want to live life king size? Then get a UIN. If the value of a single trade exceeds Rs. One lakh, then you would need a Unique Identification Number.

It is important to note that PAN (Permanent Account Number) is a mandatory document for stock trading (or rather, any financial investment in India).

Now that you are well-equipped with the necessary information and have completed all the pre-requisites, how do you actually trade? It is quite simple. All you need to do is to inform your broker or intermediary about the stocks that you want to invest in and the quantity. You can either inform them on the phone or place in your request online on their portals.

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Some things to keep in mind while placing the orders with your broker:

 

Trade Confirmation

Leverage technology (emails, SMS, etc.) to get timely updates about trade confirmation.

Clarity about the stock exchange

You should always clarify which exchange (NSE or BSE) would you like to trade on. Usually, there is a marginal difference in the stock prices.

Risk disclosure documents

Read these documents thoroughly and get an in-depth understanding of the contents. It generally forms part of the registration formalities with the brokers.

Once the broker places the order, the monetary part of the trade (cash inflow or outflow) takes place through the trading account. The Demat account gets updated with the transaction details. And voila, just like that you have complete your first stock market trade!

The “how” to invest in stocks in India is fairly simple. It is the “why” and the “when” decisions that are more complex. However, it is safe to say that if you have a clear vision of what you want to achieve in the long run and are through with the basics, you will have a comfortable journey.

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