When you think about investing your savings somewhere that can give you decent return stocks are one of the first tool that comes to mind. And there is a reason for that, stocks have outperformed all other asset classes in long run. In India, the common people are becoming more and more aware of stock investing in recent years. No one wants to miss this great opportunity. But to get benefit from stock investing you must have some knowledge and research before starting.
In this article, we will discuss how beginners can invest in the Indian stock market. We will also publish some informative articles in this series, links to those articles will be updated on this page.
How to invest in the Indian stock market
- Open a Demat and trading account with any registered broker.
- Do your research on what stock you want to invest in.
- Transfer the money from your bank account to your trading account.
- Put the buy order from your trading account.
- Your broker will buy shares for you at stock exchange.
- Shares will be credited to your Demat account. A Demat account holds your shares and other securities in digital form same as a bank account holds your money.
- You can sell these shares whenever you want. While selling, the stock will get debited from your Demat account.
- If you want to do intraday trading (buying and selling shares on the same day), there will be no delivery of shares in your Demat account.
We will talk in details about all these steps and different components of the Indian stock market that an investor should know before starting their journey in Indian stock market.
The Stock Exchanges in India
In India, there are two major stock exchanges namely BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). Investors can buy and sell shares at these stock exchanges through the member brokers of these exchanges.
Stock exchanges are the marketplace where member brokers perform buying and selling of shares on your behalf. All these buying and selling and order placement by the investor happens in electric format. So there is no need to sign any document or visit any place for buying and selling shares. You can simply put your order at the broker’s portal and your broker will pass it to the stock exchange. As all these processes happen in electronic form so there is almost no time lag in this. All major brokers transfer your order to the stock exchange in real time. And it will execute at the stock exchange if there are enough buy and sell orders to match your order.
The Stock Broker
Brokers are members of stock exchanges. Investors can not place an order directly at a stock exchange. He will have to use the service of a stock broker to do this. Brokers take the investor’s orders and forward them to the stock exchange through their portal. These orders are matched against orders of other investors and executed if matched. To avail services of these brokers, you will have to open a trading account and a Demat account with them.
Other than full-service stock brokerage firms several major banks, NBFCs also provide stock brokerage services. You can select your broker based on their charges and services. Before selecting a broker you must confirm it is registered with SEBI the market regulator in India.
The Demat Account
To trade in the Indian stock market you will have to open a Demat account. A Demat account is similar to a bank account, it holds your investments like shares, bonds, government securities, Mutual Funds, ETFs etc in electronic format; the same as bank accounts hold your money. Similar to a bank account anyone can deposit securities in your Demat account but no one can withdraw without your authorization.
When you buy some shares they will be deposited in your Demat account. And when you sell, it will be withdrawn from your Demat account. Your broker needs your authorization at the time of selling the securities. So that it can withdraw the same from your Demat account and transfer it to the new buyer.
Before knowing how to open a Demat account we must know about depositories and depository participants.
The Depositories And Depository Participant (DP)
There are two government registered central depositories in India namely CDSL (Central Depositories Services India Ltd.) and NSDL (National Securities Depository Ltd). All Demat accounts in India are held by one of these two central depositories. These depositories have their registered agents that are known as depository participant or DP in short. An investor can open a Demat account in these depositories through the member depository participant (DP). All stockbrokers, major banks and several NBFCs work as DP for these central depositories. Investors should compare the charges and services of different DPs before choosing one.
How To Open a Demat Account
So as you know now it is a must to open a Demat account for investing in the stock market. The next question is how to open a Demat account. So let’s discuss the process to open a Demat account. Opening it a really simple process. You can open the Demat account online or offline.
For opening a Demat account online you need a valid PAN card, Aadhaar, a copy of your photo and signature, and your bank account details. In the online process, Aadhaar will work as your proof of identity and proof of address. You will also need a valid mobile number that is linked to your Aadhaar. This mobile number will be used to receive the OTP while verifying your Aadhar details online.
If you do not want to give your Aadhar details you can open a Demat account offline. In case of offline, you can use any other valid proof of identity and proof of address in place of Aadhar.
Nowadays the online Demat account opening process is quite fast and in most cases will process within 24 working hours. When you sign up at the DP’s website using your email and phone the DP will start your account opening process. In case of online account opening, there will be no offline paper work and all documents will be digitally signed. In case there is an issue with the documents you submitted the DP will contact you through email. However now in most cases, the DP will provide you assistance on phone through your account opening.
In case of offline account opening, you will sign all the documents on paper and submit them at the broker’s office or send it through postal mail. In the offline Demat account opening process you will have to give a cancelled cheque leaf or latest bank statement to verify your bank detail. The offline Demat account opening process will take a bit more time in comparison to the online process.
What is Power Of Attorney (POA) and e-DIS
At the time of the Demat account opening, you will have to sign the Power Of Attorney (POA) document. When you sell some share or any other security your broker needs to withdraw it from your Demat account. But the broker can only withdraw shares automatically if he has power of attorney. POA is a legal document that gives your broker the authority to withdraw securities from your account so that he can sell it on your behalf. POA could be full or limited type.
But due to increasing abuse of POA by some brokers, CDSL and NSDL have introduced the e-DIS method. E-DIS uses TPIN for every sell order you make in your Demat account. It is safer than POA which was the one-time standing instruction that works for all sell transactions. With TPIN you will have to approve the transaction every time you want to sell some security from your Demat account.
So now you can open a Demat account without submitting a power of attorney (POA) to your broker. All major brokers now open an online Demat account without signing the POA documents.
Demat account has several charges like account opening charge and annual maintenance charge. Which can vary from 300 to 800 per annum. You must compare the charges of different brokers before opening the Demat account.
What is Trading Account
Other than the Demat account you also need to open a trading account with a broker. The trading account is the account through which you place buy and sell orders of shares or other securities. When you place an order through your trading account on the broker’s portal it forwards it to the stock exchange. All these processes happen in electronic form so there is almost no time lag.
There also could be the account opening charge and annual maintenance charge for the trading account. But nowadays almost all major brokers provide a free trading account to their customers. However, investors should compare the charges of different brokers before opening the trading account.
What is a 3-in-1 Account
Several major banks that also provide stock brokerage services provide the Demat, trading and bank account that are linked together. This is called a 3-in-1 account. The benefit of this type of service is that with all the 3 accounts linked to each other the deposit and withdrawal of cash in your trading account becomes faster.
However with online transaction being so easy these days, the fund transfer to and from trading accounts is not a big deal for most of the investors.
Why You Should Invest in the Indian Stock Market
You probably already have got good reasons for investing in the Indian stock market. But if you are still in doubt you can see how good companies in the Indian stock market like MRF, Infosys, HDFC, Eicher Motors have created huge wealth for investors. For example if you have invested Rs. 100,000 in Eicher Motors in 2009 it would have turned into Rs. 35 Lakh in 2019. This is just an small example, there is history of so many good companies that has created huge wealth for their investors.
If we keep aside these multibagger stocks that have made investors money manifold, still the average market overall has outperformed the other asset classes. If you do proper research before investing you can find good companies that can provide you decent returns in long run. However, you should also keep the risk in mind before investing. With good diversification practice and long term investing the overall risk can be mitigated successfully.
Also you should learn different basic financial concepts that affect the stock market and can affect your investment. Making yourself aware of common understanding about the business of the company you invest in will also be helpful in your stock investing journey. Always remember learning never ends in the stock market.
Tags: How to invest in the Indian stock market. Process to invest in the Indian stock market.