How To Invest In Stocks?

We all have at least that one Uncle or Aunty, who keeps on giving advice to our families on investing in the share market. Over the years, he/she has made money out of thin air and as a kid I have always been amazed by this sorcery. This was what pushed me into understanding finance and now even after completing 15 years in the share market, I am nothing close to being a seasoned trader.

I am sure like me many others would be struggling to find out things about the stock market on their own. However, in today’s world, thanks to the internet, you have the information on your finger tips and it’s relatively easy to find out about ‘Investing in stocks’ and how to go about it. Below I have tried to list down in a very simple way what does a person needs to know to begin trading in the stock market:

Introduction

Most of the trading in the Indian stock market takes place on two stock exchanges: The Bombay Stock Exchange (BSE) and The National Stock Exchange (NSE). The BSE has been in existence since 1875. The NSE was founded in 1992 and started trading in 1994. Both exchanges follow the same trading mechanism, trading hours, settlement process, etc. There are 7,000 + stocks listed on the BSE which is the larger of the two exchanges in terms of the number of companies listed. However, only 3,000 of these stocks are actively traded.

To start investing in the stock market, you need 3 types of accounts – Trading Account (to place buy/sell orders), Demat Account (to hold your shares in dematerialized form), and a Bank Account (for fund transfers).

• Trading Account

  An account similar to a bank account, to be opened with a ‘stock exchange registered stock broker’. This account is used for placing orders in the stock exchange (i.e. to buy/sell shares).

• Demat Account

  An account where shares are held in a dematerialized form (i.e. electronically instead of the investor taking physical possession of certificates). The demat account is required to receive/transfer shares when you buy/sell shares through your trading account.

• Bank Account

  Your regular Savings or Current Bank Account should be linked to your trading account. The Bank account is required to transfer/receive money when you buy/sell shares through your trading account.

Typically, if you sign up with a stock broker, they will guide you not only in the opening of the trading account and a demat account but also help in linking them to your bank account. Just like banks provide you with the facility to open and maintain saving accounts, the Depositories provide the facility to open and maintain demat accounts. In India, the government has mandated two entities –National Securities Depository (“NSDL”), and Central Depository Services (India) (“CDSL”) – to be the custodian of dematerialized securities.

Most of the big stock brokers register themselves as a Depository Participant (“DP”) who act as an agent of the Depositories to make their services available to the investors. Effectively, both your trading and demat accounts are maintained by your stock brokers (mostly through setting up of 2 different entities). In case of some stock brokers, they use the depository services of other bigger financial institutions or custodians and only provide the front-end trading account. As an investor, you can’t really say that the first approach is better than the second for you. This is because in both the cases, typically it takes the same amount of time for shares to be deposited and withdrawn from the demat account.

To open a trading / demat account, follow the following process:

• Approach a BSE and NSE registered stock broker.

• Fill up the KYC form provided by the stock broker.

• Attach the required documents – (i) identity proof and (ii) address proof.

• Produce the original PAN card during account opening.

• For Derivatives segment (i.e. futures and options market), 6 months account statement of your existing bank account is required.

• One cancelled cheque of the bank account you want to link to your trading account.

• 3 passport size photographs

Nowadays there are brokers who offer complete online services for the same. So the hassles of getting the above formalities done off-line have been reduced to nil. Infact, some sites like 5paisa.com give a complete trading solution.

What you should look at before opening a Demat and a trading account scheme:

1. Account Opening Charges: This is the fee charged at the time of opening the demat and trading accounts.
2. Account Maintenance Charges: This is the annual fee charged to maintain the demat & trading accounts.
3. Brokerage Charges for Intraday transaction: If you take a position (buy) on a stock and release (sell) that position before the end of that day’s trading session, it is described as intraday trading. The brokerage charges for intraday transaction are very nominal. In fact, nowadays you have flat brokerage rates for whatever amount of trade you do.
4. Brokerage Charges for transaction requiring delivery: If you buy a share and hold it beyond that trading session (i.e. for a term longer than one day) or when you sell a share you own and do not buy it back during a single trading session, the transaction qualifies as a delivery based transaction as the name of the owner of the share is changed with the Depository. The brokerage charges are higher in this case as additional processing is required.
5. Brokerage Charges for Futures and Options transaction: The Brokerage fees applied on the transaction in the Futures and Options segment (mostly varies 0.02 – 0.05% on the total cost of transaction for futures and ?25 – ?100 per lot for option contracts). The rates mentioned here are just tentative and we would urge you to check with your broker.
6. Apart from the brokerage charges, you may want to consider the software/ technology provided by the stock broker for online trading. And also check if the stock broker has a good service standard for call and trade facility (to enable you to place orders over the phone).

These days, most big commercial banks provide trading and demat account services and link it to your savings account. However, their brokerage charges are higher than specialized stock brokerage firms.

Many people consider having a trading account with a Bank (like HDFC, ICICI, Kotak, etc.) as an advantage as these banks provide a three-in-one-account (i.e. savings account, trading account and demat account which are all linked to each other). However, the brokers provide integration with multiple bank accounts, wherein one could use any of their bank accounts to transfer money for the transactions. Having all these accounts linked to each other ensures that you get a complete paperless mechanism for trading. Thus, now those days have gone wherein one could say that the beginners and low volume investors/traders should better have their trading accounts with a bank.

It is advisable to open your account with a broker who gives you the best service at the lowest price and helps you make money and in turn ‘Builds Wealth’ for you.