In my 12+ years as a financial analyst, trader & investor in the stock market, I have been asked this question many times – How to start investing in the Stock market?
To start investing in the stock market, you need to approach it as a dedicated approach to building wealth. This means to understand how to structure your plan about learning and finance so that you can generate the high returns of stock markets.
It’s no doubt that when researched properly (which you will learn here), you can generate very good returns and create wealth in the share market.
Learning how to start investing make the foundation of how much wealth you can create over time.
This post is quite long because I am going to cover all the steps and points that you need to understand when starting to invest in stock for the first time.
- Before we begin
- What do you need to start investing?
- Building personal wealth plan – a two-step process
- Important parameters to keep in mind
- Rules of picking good stocks
- When is the right time to invest in share market
- How to build your portfolio of investments
- Robo-advisors: Can you outsource research to them?
- Frequently Asked Questions
- Final thoughts
Before we begin
You should take care of few steps before planning to start investments in stock market.
The reason is simple. Investing is building wealth. And building wealth is no short term game.
Of course, you can trade to earn money from stock market, but that is not building wealth.
And whenever you are in a long term game, please don’t take or expect short cuts.
Your personal finances decide a lot about how much wealth you can build over time.
I will again advise you to take care of below mentioned steps side by side when you are learning to invest in stock market.
Why pay your credit card and personal loans first
I ask most of beginners in stock market to first reduce their credit card and/or personal loans first.
There are two reasons:
- Credit cards and Personal loans have the highest rate of interest. You can be paying between 18-36% on an annual basis in interest for pending dues. This means if you invest in a mutual fund with an average growth of 15% per year, then you are actually losing money.
- All the good investments take time to pan out. But, they don’t work in a time frame. So you may think that this stock or that stock will rise by 30% and I will pay back the loan. Most of the time, it won’t grow that much within that timeframe.
Super quick way to build emergency funds
A normal calculation to having emergency funds is that it should be equal to 6 months of your monthly expenses.
Well, here is the interesting part, it is equal to your spending, not you earning. Which means just do these two things and you will be building your emergency funds in less than 6 months.
- Don’t calculate your luxury items as part of your monthly expenditures. These are the things you can stop anytime. Like subscription services.
- Try to save more than 40% of your income for 2 months. That alone will help you create a strong emergency fund in the shortest possible time.
How to automate saving a part of your income for investment purpose
Once you have completed above mentioned two steps, it is now time to save money for investing itself.
Set up a separate savings bank account. Every month when you receive your pay, just transfer 10-15% of your salary to this new account.
Before doing anything else with your salary, just transfer the amount. Within a couple of months, you will get adjusted to your new salary and on the side, you will have a strong investing capital growing in no time.
Now over to next step (which you can do side by side).
What do you need to start investing?
Here is the list of basic things you need to start investing in share market:
- Bank account
- Demat & Trading account
- Time to learn
- A learning schedule & resources list (like the step by step course you can sign up on the right side).
For demat and trading account, you will need to complete the basic KYC with any of the reputed brokers.
I usually recommend Zerodha & Upstox for investing purposes, because they charge zero brokerage for equity investing.
For KYC, you will need:
- Cancelled cheque of your savings account
- PAN card
- Address Proof (If you have aadhar card, then you can complete this process online in 20 minutes)
It will take a total of 20-25 minutes for opening your account. You can follow this link to know the step by step process to open your trading account online.
That’s all you need to get started, now let’s move over to next steps.
Building personal wealth plan – a two-step process
Now, that your investing bank account is linked with your trading and Demat account, it is time to move to next step.
Mostly people try to read and learn a lot when learning about investing in stock market.
It doesn’t have to be this way.
You can actually divide your wealth building plan into two steps
Step 1: Start with delegated investments
You don’t have to learn everything first and then start investing. Not at all. You can actually invest while you are learning.
And that to in very easy manner.
There are 2 main instruments to start investing in stock market.
- Direct Equity
- Mutual Funds
As a beginner, I will advise you strongly to start your first investment in the stock market through mutual funds.
In simple terms, mutual funds are delegated form of investment. Here, retail investors like you put money in a fund. This fund is handled by a professional called a fund manager. He analyses, researches and invests in the stock market on behalf of all investors.
Thus, while you are learning about stocks and shares, you money is still getting invested. This eases a pressure on you to learn fast.
Within mutual funds, one of the safest ways of investing is through Index funds. Gradually, when your knowledge improves, you can add 2-3 more mutual funds to your investments.
Once you get comfortable with steps, you can start researching stock and start investing directly in the equities. This is the second step.
Step 2: Start taking control
Now, many investors are happy with mutual funds investments itself. And they don’t wish to or they don’t have time to learn more about stock market.
So, this second step is optional.
But, if you wish to learn and take control of your investments, this is how you proceed:
You either read few of the introductory books on investment to understand investing in stock market.
Or you can take an introductory course to learn it faster and better.
Once you have a basic understanding of the share market. It is time to read more about shares and understanding of businesses.
You should also install a stock market app to use your time wisely about researching shares.
One of the most important points is that you should always start with the business sector that you understand the most.
So, for example, if you are in the IT industry, start with understanding the business and financials of IT companies. If you work in banks, then start with the banking sector.
The reason is that because you are working in that sector, you will understand the business model faster.
And without understanding the business model, it is difficult to judge the value of that stock in the long term.
Important parameters to keep in mind
Before you make your first direct investment in the stock market, you need to keep a few important parameters in mind.
As I just mentioned that you start with sector that you understand. Within that you need to filter out the bad apples.
Why not to research bluechip stocks
You should not invest in mature companies. Yes, that may sound counterintuitive to not invest in bluechip stocks.
Let me explain why.
You remember the first step to start investing with investing in index funds?
Well, index funds invest in companies that are part of the index. And all the bluechip companies are part of the index.
Which means you are already invested in them. Why to waste your effort and money to repeat your investment in same company?
And the second reason is that rarely a mature company will be multi-bagger. Wealth is in multi-baggers only.
You shall start your research into the stock which are already not in your portfolio through mutual funds.
Financial parameters to use
Now, once you eliminate bluechip companies from your research, you need to find good companies from large caps and mid-caps (learn about these terms in this post)
And within these companies you need to use following parameters to select the stocks with strong financials.
The list of financial parameters to check a potential company are:
- Sales and Profit should be increasing over time
- Earning Per Share (EPS) should be increasing
- Return on Equity (RoE) should be good
- Debt to Equity Ratio should be within safe limits.
- Current share price vs Earning ratio should be good.
Don’t worry. You don’t need to calculate any of these factors yourself. You can use the free stock screener to find this information within a few minutes.
I use screener.in for most of these researches. You can also find the same information from moneycontrol or equitymaster website.
Let’s take an example.
Using screener, let’s find out stocks with following parameters:
Sales and profit growth > 10%
EPS – positive for last few years (5 years in our example)
RoE > 25%
Debt/Equity Ratio <=1
Share price/earning ratio <lower than other companies in same sector
Here is the screenshot of running this query:
From here, you select the companies which belong to sector you understand about and research further into them.
Area of competence
It takes time to understand the business model of a company. That’s why I stated that you should start with companies which belong to business sector you understand.
Only when you understand the business, you can make good use of financial parameters mentioned above.
But, there are many companies which you can understand about by reading about their business models as well as media reports about them.
Nearly all the stock market app, provide such information and reports on regular basis in easily digestible format.
For example, FMCG companies, Auto companies in India don’t require you to be from same sector to be able to research about them. You can easily do that using the information provided by the research websites.
Rules of picking good stocks
There are few rules to investing which don’t change when you start investing in stock market or even when you have been investing for sometime.
These rules, are opinions and thoughts of successful investors. And they have proven to be quite useful from the beginning itself.
One of the most important factors that can assure that a company will keep growing at same pace over time is the competitive advantage it has.
The competitive edge, can be the economic moat, brand perception or logistics. It is called as edge because it can’t be easily copied by other companies.
For example, in phones, Apple has brand perception edge, Mi/Vivo have price edge, Samsung has premium android edge.
Similarly, in Autos in India, Maruti has price, logistics & brand perception as an advantage. (this is not a recommendation to buy Maruti, but an educational example).
Important: This edge is one of the factor for valuing a company. You need to also see, for how long the the company is going to maintain that edge. Like Apple is losing some of its edge in Indian market to OnePlus phones (year 2019-2020).
Debt and usage of debt
Some businesses are developed in such way that they have nearly zero debt on their accounts.
Then there are companies that need debt to grow. None of them are superior to others.
It is how a company handles the debt, which defines the growth of that company.
Which means when you are analysing the financial reports of any company on your list, you need to see their handling of debt.
For example, if a company is using good growth to either reduce the debt or to keep it at low levels, then you can be sure about the financial management of that company.
But, if a company is adding more and more debt on its books in pursuit of growth, then that is a red signal as a retail investor. Avoid at all costs.
Management of the company
A mediocre business model can work wonders under an efficient management. On the other hand, a good business can fail if the leadership is not able to manage properly.
Here, I am talking about management quality of a company. And one of the most difficult factor to asses properly.
You can still take an educated guess about the management quality of a company through little research.
Look at the history of key management people
In this time of internet, it is quite easy to look into the credentials and history of most professionals.
I am not talking about Facebook. LinkedIn is good place to start.
Look at the key position that person has worked on and the results of those times. A cursory look at such things will tell you a lot about stability and approach of a professional.
In case of family owned or promoter owned company, look at their holdings in the company and their approach for hiring smart professionals for growth of the company.
Download the annual reports of these companies of last 2-3 years. Read about notes from top leadership about vision of the company and what they are planning to do in coming years.
Then check it out with the actions that were taken in next year. This will show how much action is there to support the weight of their words.
Market potential of the sector – step that most new investors miss
This is the step that most of new investors miss.
No company can grow higher than the market potential of the market in which it operates.
Let’s take an example of real estate sector.
There is huge hosing requirement in India and it will be there because owning a house is a strong motivation in our culture.
But, whenever, companies take huge loans and build housing projects faster than people can buy and use them, it leads to unsold inventories. Even best of real estate developers are stuck with huge invested capital.
In such a scenario, even if a company is with zero debt, capable management, and competitive advantage of the brand, the chances of its share prices growing is very less.
So, you need to look at market potential of growth to see how much scope is there.
This is a tricky question.
Ideally you should be investing when market is going through a correction but it takes lot of courage to invest when markets are falling strongly.
But, it is not that easy. Such corrections take time to come. Such big corrections in last two decades were in 2000, 2008, 2010 and then in 2020.
The difficult part in such cases is that markets can keep on falling for some time after you have invested. It makes you doubt if you have invested wrong.
My advice is, keep your mutual fund SIPs on going and once a year keep tracking the performance of your fund as compared to peers.
And when you have enough knowledge about stock market to start investing on your own, even then you start with small amount.
Make your investments in parts. But more than that, keep track of the company you are investing in.
The only way to hold you investments in any company is by knowing the business.
A good business with good management will survive temporary setbacks. And that is what will help you hold your investments when the prices go up and down.
How to build your portfolio of investments
It doesn’t matter how much amount you start with.
When you are learning about how to invest in the stock market and developing your research skills, start with 1-2 stocks.
Even if you find 10-15 stocks that you want to invest into, chose top 2-3 to begin with. This way, you will be able to track your stocks better and also know if you made the right research.
When you have a SIP of couple of mutual funds, emergency funds and direct stock investments, you are diversified enough. Investing in each and every investment option will make it difficult to track and get maximum returns.
Focus is the key. It improves with practice.
Learning to invest in the stock market is a continuous process. There are a few fundamental things which won’t change, but how to use them will definitely change.
Robo-advisors: Can you outsource research to them?
The times of robo-advisors is coming. There is no doubt about it.
These robo advisors are designed to research and recommend stocks based on principles of fundamental analysis. The real benefit is their low cost.
Low cost of robo advisors bring the research of wealth advisors within reach of beginner’s in stock market.
But, can you completely outsource your research to these robo advisors?
My answer is, there is no easy replacement of self learning and research. So what you can do is get the recommendations of these robo advisors .
And then use your research skills to find the top 2-3 stocks to invest into. Because the list is already filtered, it saves you a lot of time in going through all the potential stocks on your own.
Frequently Asked Questions
Do I need finance degree to invest in stock market?
Absolutely not. You don’t need a finance degree to invest in stock market. What you need is a keen mind and disciplined approach to create wealth in stock market.
I am MS( Finance) and in stock market for 12+ years, and I can say with experience and authority that you don’t need finance degree to invest in stock market.
How much should you invest in stock first time?
You can start with as little amount as you can afford. In certain mutual funds there is a lower limit to first time investment to be around ₹ 5,000. Few have lower limit too. So you can start with this amount.
In case of stocks, though you only need enough money to open a demat & trading account and buy 1 share of a company, it is good to start investing with minimum ₹ 10,000.
What are the best stocks to buy for beginners?
Stocks which are large cap or mid cap, from the industry you know about & with good financials are good investments for a beginner.
Don’t buy blindly. You should have a good reason to invest in a stock.
Keep your attention to limited number of stocks as beginner.
How much money do I need to start trading stocks in India?
There is no lower limit of much you can start with. But, there are minimum requirements to invest or trade in stock market securities.
So, for investments, you only need the amount which is equal to price of a single share. For trading, you need the minimum margin to start trading in stocks in India.
Of course, you can invest ₹ 1000 in share market. How many shares you can buy is dependent on share price.
You can buy 4 shares when price is ₹ 250, 2 when price is ₹ 500 and 10 when the price is ₹ 100 each share.
Learning to invest is one of the best wealth building skills you can work on. It is enjoyable. All it needs is a good start.
I have compiled this guide for absolute beginner’s in stock market. Once you are through with steps in this guide, sign up to step up your learning process. The sign up form is right here on this page.
If you wish for me to cover anything that I missed in this post, do mention that in the comment section below. I will update the post.
Please share your thoughts about investing stock market to build wealth in the comment section below.