In the previous article, we have understood the meaning of investing in stocks. Click here to read the first part.
Since you are reading PART-2, it implies that you are further interested in knowing more about stock investment. Moving ahead, let us see how we can invest in the share market or in other words how we can buy shares of a company. Well, stocks like any other item may be bought from a market only which is known as the stock market. Presently there are two such market places, namely BSE (Bombay Stock Exchange) & NSE (National Stock Exchange). Companies sell their shares mainly through these two marketplace companies. So, can we directly go to BSE/NSE & buy shares of the companies? The answer is NO. They don’t sell directly to us. They sell us through an authorised broker which is responsible for payment settlement & deliveries on share transactions on our behalf. In order to purchase a share, we need to have 3 types of accounts:
- Savings account/Current Account: Normal banking account
- Trading account: For trading (for only selling & purchasing shares)
- DEMAT account: For keeping the purchased shares safely
First of all, we need to have a banking account of Savings or Current type. After that, we need to open a trading & a Demat account. Normally both types (ii & iii) are offered by the same company. Some of the companies that offer trading & Demat
Once you have opened trading & de-mat accounts, you are good to go. But before opening the account, there is one more thing that you need to check. i.e. brokerage, fees, commissions etc. Every company has different brokerage rates. Some charge as a percentage of the total amount of transaction, some charge flat rate on per trade basis, some of them have even zero brokerages. For example- Zerodha has brokerage rate of 0.01% or Rs 20/- per trade which is the most economical one. Some bigger companies may charge higher rates which will ultimately increase your purchase cost. Hence, we should choose the broker company that gives the best brokerage rates as it saves us a lot of money in the long run if we trade frequently. Some of these broker companies give you limits for purchasing more shares in less money. It is very much like a bank loan. Let us say you have transferred Rs 10,000/- to your trading account. The broker company will allow you to purchase shares up to an amount of Rs 40,000 /- i.e. four times of your own capital. This is popularly known as leverage. Let me warn you that this is the most dangerous aspect of stock trading. Consider a case in which you buy 400 shares of FISHERMAN CO LTD for @ Rs 100 per share, costing you Rs 40,000/-. You were allowed to buy 4 times more shares as you would have been able to buy only 100 shares with your own capital. You will be very happy thinking that if shares price grow by Rs 50/-, you will earn Rs 20,000 ( Rs 50×400) now, while with your own capital, profit could reach only Rs. 5000 (Rs 50 x 100). But this is where your attention is needed. Just think otherwise now, if there is a loss of even Rs 25 per share, your total loss will be Rs 10,000 (Rs 25X 400) which is your entire capital. Hence, your entire capital will be lost if shares fall by 25% while if you would have bought it with your own capital only, your loss would have been limited to Rs 2500/- and still, your 75% capital is intact. A majority of new entrants in the share market loose money this way. This is a lure used by broker companies to make you trade with higher money for higher commission with no loss of theirs as they allow loss only up to capital invest by you.
I believe that you now understand the basics of investing in stocks. Finally I would like to put forward my three suggestion:
- Open your trading & de-mat account carefully where charges are low.
- Learn methods of trading in the stock market thoroughly before starting trading.
- Avoid leverage always
Happy investing. Please feel free to write back in case of queries.
@PLANMONEYonline / email@example.com