Lots of investors wish to participate in equity markets but do not know where to start from. Some have partial knowledge about the markets and there are others who are completely ignorant. There are others who take great pride in saying I do not invest in stock market. As I have written in the first & second issues of market wisdom, the Indian saver cannot ignore equity investments; falling interest rates and withdrawal of tax concessions on income generated out of government and bank savings coupled with rising inflation has necessitated participation in equity markets. Equity investments have a potential of generating highest revenue compared to other financial investment options. Knowledge of course is the first requisite.

There are several ways of getting introduced to the stock market, I would recommend the way which is the safest

  • To begin with reading about the markets is the first requirement.
  • Start reading the share market page in the newspapers. There is a summary on the stock prices’ page of what happened during the day that gives you a fair idea of the market activity.
  • Business channels on the television also make you familiar about the markets. If you are working during the day, then watch the market report, which is broadcast by most channels in the evening.
  • There are also websites like www.moneycontrol.com specifically dedicated to markets providing regular updates.
  • Initially it may sound very boring. It can be made interesting if you focus on 2-3 stocks only. Just pick names that are familiar to you such as Reliance, Infosys, etc. You may also be working for a company or bank or supplying to any company, then select such names. Housewives identify the stocks by reading the labels displaying the manufacturing company name on the packaged product they buy. Students can look at the company stocks that they have done research projects in. In short there are enough company names available around us. Maintain a journal or a diary and write down these company names. To make it more interesting, predict the stock price for the next day, whether it will go up or down and why. Spend 15 minutes daily and write down whether your predictions were right or wrong and why.

If you do this for 6 months on a continuous basis then you would have sufficient knowledge to experiment with the market.

Do not commit any money at this stage. Assume that you have Rs.1 lac and note it in your diary as capital. Make buy decisions with this money in the 2-3 stocks that you have been studying. Make a note of it in the diary by looking at the closing prices take buy-sell decisions. Each time you make or lose money, write down why it happened. Several analysis of leading company stocks is available on business channels, web sites and business news papers. Plus you will also read news items. Another important source of information is website www.bseindia.com / www.nseindia.com. These are the official web sites of Bombay Stock Exchange – BSE Ltd and National Stock Exchange. which captures results and news about companies. During this period there has to be intensive self-learning. Try to analyze why your decision was correct or otherwise. In a rising market you will be very successful often, that does not mean you are a great stock picker. Learning will happen only if you analyze the reasons for rise or fall in prices. Doing this on a regular basis for 3 months equips you to start committing money.

In order to start trading on the exchange, three accounts are necessary

  1. A Trading account with a broker
  2. A Beneficial Owner account with a Depository Participant and
  3. Bank account. 

Most of you would have a bank account. However, for online trading, a Bank with either online banking or core banking facilities is necessary for hassle-free trading. Hence if your bank does not offer such services then a new account would be essential. Most online brokers have tie-ups with Banks for online transfers, once you select a broker then look up for the banks which have links with the broking site, open account with such a bank. I have already written about Broker selection in Market Wisdom, which should be referred to in order to select the right broker.

The account opening form of the broker has four components – The Know-Your-Client (KYC) form, separate agreements for trading on BSE and NSE, Risk Disclosure Document and certain Power of Attorneys. Ensure that you read the Power of Attorney carefully and give authority only for delivering shares to exchange on your behalf against your sale trades and not for any thing else. The KYC form captures your contact details and your financial worth. This Form is also accompanied with Proof of your identity, proof of your residence and Permanent Account Number (PAN) card. Proof of identity can be given by submitting a copy of your Passport, Voters card etc. You need to get your photograph attested by your banker. Proof of address is ration card, latest electricity bill etc. All documents should be produced in original for verification.

Make sure you read the risk disclosure document before signing and submitting to the broker. This document will explain the different risk involved with your transaction for which you will be responsible. There is an inherent risk of price variation (volatility) of the securities you have dealt in, risk due to low liquidity in a particular company, risk due to more than normal difference between a person wanting to buy and another wanting to sell. The document also explains certain risk mitigation measures that can be used by you.

On submitting the completed set of document, the broker will scrutinize and if found everything in order will allot a code normally referred to as client code to you. You may need to furnish this code every time you want to transact. Having got your client code you can start transacting in the stock market. However you need to ensure that you have paid the requisite margin money as stipulated by your broker to place any transaction. Initially you start with placing orders in small quantity between 1 to 10 shares. Once you have understood the system in full you may gradually increase the size of your transaction.

Written By:

Deena A. Mehta

Managing Director

Asit C. Mehta Investments