Here are some quick pointers on how to buy shares:
- Apply for a PAN Card
- Open a Savings Account
- Find a suitable Stockbroker
- Open Trading & Demat Account and
- Start Buying.
Want to know more about what goes into buying a stock and how it’s done the right way?
Then the detailed article below is what you need to read today.
Let’s begin with some basics…
What is a Share?
A share is nothing but a part of the ownership of the company issued to the general public to raise capital. So when you buy shares of a company, you become the owner of that company proportional to the value of shares.
Why Buy Shares Online?
There are two most important reasons to buy shares online:
Capital Appreciation is an increase in the value of a stock over a period of time. Technically speaking, capital appreciation is the difference between the purchase price and the selling price of the stock.
To understand better let’s consider the example of Reliance Stock:
- Mr. Abdul, who knows to analyze the company’s financial statements has been following Reliance for a while now.
- On Sept 14, 2005, Mr. Abdul decided to invest in Reliance. On that day the stock was trading at ₹ 140.29 and Mr. Abdul bought 712 shares worth ₹ 99,886.48 (140.29*712).
- On Sept 14, 2020, Mr. Abdul decided to sell the stocks and on that day the reliance stock was trading at ₹ 2,297. So investment worth will now be ₹ 16,35,464 (712 shares x 2297).
- That’s a whopping profit of ₹ 15,35,578 or you can say the capital appreciated by more than 15 lakh rupees.
A dividend is paid by the company to its shareholders every year. It is a part of the company’s cash reserves or profits. The companies don’t have an obligation to pay dividends to their shareholders.
Myth: More than 90% of people think dividends are paid only when the company makes a profit. It is not true, companies with good cash reserves pay dividends even if they are not making any profits.
Let’s take the example of Reliance Stock again:
- In July 2020, Reliance paid a dividend of ₹ 6.5 per share.
- As you had 712 shares of Reliance, you would receive a dividend of ₹ 4628 (712 x ₹ 6.5).
- The dividend is expressed as the percentage of the face value of the share. So in July 2020, Reliance paid a dividend of 65% as the face value of the share is ₹ 10.
What attracts you to buy shares? Capital Appreciation or Dividend Income?
That’s a choice to make.
Now that you know why you should buy shares, let’s learn how to buy them!
How to Buy Shares Online?
Step 1: Apply for a Pan Card
Firstly, you need to apply for a PAN Card if you don’t have one. Here are some of the uses of PAN Card:
- PAN Card is a must-have to make any financial transactions in India.
- PAN Card acts as a valid identity proof.
- Can be used to file Income Tax returns.
- Mandatorily required to Open Savings Account, Trading & Demat Account, etc.
Step 2: Open a Savings Account
Once you have got the PAN Card, you need to open a Savings Account with the bank of your choice.
In investing, the savings account is needed to transfer the money into the Trading account.
Step 3: Find the Right Stock Broker
A stockbroker is an organization whose primary objective is to provide a Trading and Demat account to help investors in buying and selling stocks or any other financial instruments.
What is a Trading Account?
It is an account that allows you to buy & sell financial instruments listed in the stock market.
What is a Demat Account?
The Demat account helps you store the financial instruments bought in the stock market in an electronic form.
There are Two Types of Stockbrokers:
A full-service broker also known as a traditional broker provides value-added services along with the Trading & Demat account.
Some of the extra benefits include:
- Investment tips
- Research reports
- Helps manage portfolios
- Guide with retirement planning
- Overall wealth management
To further simplify, a full-service broker will provide you personalized services and guide you to make the right investment decisions throughout your investment journey.
As the name goes, a discount broker provides limited services at a discounted or fixed rate. Ex: ₹ 20 per order.
Discount brokers provide only a platform using which you can buy and sell financial instruments. They do not provide any personalized services or investment tips etc.
As you can see clearly, a full-service broker provides a wide range of services compared to a discount broker. Well, all this comes with an extra cost.
Full-service Brokers in India charge between 0.3 to 0.5% on turnover, on the other hand, Discount Brokers charge a fixed brokerage fee of ₹ 15 per order.
Let’s compare how much brokerage would be charged when you buy Shares worth ₹ 1 lakh with a full-service broker and a discount broker.
|Full-service broker||Discount broker|
|Brokerage charges||0.5% on turnover||₹ 15 per order|
|Total brokerage on ₹ 1 lakh worth shares||₹ 500 (100000 x 0.5%)||₹ 15|
Shocked to see a huge difference in the charges?
Well, if you are a newbie who doesn’t know where to invest, a Full-service broker will be an ideal choice for you. Although the charges are high, they add huge fair value by helping you make the right investment choices.
But if you are an investor or trader who has adequate knowledge about stock markets, you can choose a discount broker and save some extra bucks.
How amazing would it be, if a broker provided the benefits of a Full-service Broker at the price of a Discount Broker?
Super amazing right!
Well, that’s what we do at Aliceblue.
Here are some benefits of trading or investing via Aliceblue:
- Zero brokerage on Share Investments & Mutual Funds. The maximum brokerage of ₹ 15 per order on any other trade.
- Buy & sell signals and Advisory.
- Predefined Technical and Fundamental analysis strategies
- Up to 10 times margin on Equity Intraday (You can buy ₹ 1 lakh worth stocks only at ₹ 5000)
- Up to 2 times margin on Option Buying (Only broker in India to provide this service)
- Free API
Step 4: How to Open a Demat & Trading Account?
You can open an account either online or offline (Aliceblue provides both).
Online Account Opening: To open an account online, it is mandatory to have your Mobile Number linked to the Aadhaar Card. Check out the online account opening process.
Offline Account Opening: If your mobile number is not linked to your Aadhaar card, you need to follow the offline account opening process.
Documents Required to Open an Account:
- Identity Proof (PAN Card Mandatory)
- Address Proof (Aadhar, Voter ID, Passport, etc)
- Passport Size Photo
- Income Proof (Latest six month’s bank statement, Latest ITR copy, Three month’s salary slip)
- Bank Proof (Cancelled Cheque, Passbook Copy or Bank Statement with visible Bank Account Number, MICR, and IFSC code)
- Scanned copy of the signature (only in case of online account opening)
Once you open an account with the broker, you will be given a trading platform using which you can buy the financial instruments listed in the stock market.
Before you hop on to buy and sell financial instruments, you need to find the right stock to invest in.
How to Find the Right Stock to Invest in?
Considering the above example of Reliance, today it might look like Mr. Abdul made the right choice back then.
Imagine yourself in the place of Abdul 15 years ago, if you were given the choice to invest in Reliance, would you do it?
It sounds tricky because you would never be able to imagine if reliance would grow so big in the next 15 or 20 years.
But Abdul did, as he understood the company financials really well.
Finding the right stock is one of the hardest things to do, and there are different approaches that will make it easier.
3 Most Important Approaches to Find the Right Stock to Buy:
- Fundamental Analysis
- Technical Analysis
- Techno Fundamental Analysis
1. Fundamental Analysis:
It is an approach to identify the right stocks by analyzing the financial statements and overall business fundamentals of the company.
Fundamental Analysis is usually used by investors to find stocks that will perform well in the long term. What Mr. Abdul did was purely fundamental analysis.
2. Technical Analysis:
It is an approach to identify the right stocks by analyzing the charts and historical price movements/patterns. This approach will also help you determine when to enter and exit the investment.
Technical Analysis is usually used by investors to find stocks that will perform well in the short term.
3. Techno-Fundamental Analysis:
As the name goes, it is an approach to find the right stock by using a mixture of both technical and fundamental analysis.
In techno fundamental analysis, usually fundamental analysis is used to find the right stock by analyzing the company financials, etc, and technical analysis is used to determine the entry and exit points of the investment.
Techno fundamental Analysis is usually used by investors to find stocks that will perform well both in the short term and long term.
Now that we know how to buy shares, Let us have a brief understanding of selling shares.
How to Sell Shares Online?
You can only sell shares through a trading account, so the primary requirement for selling shares is to have or open a trading account.
To understand better let’s consider the example of SBI Stock:
- Assume you decided to buy SBI Shares in March 2020 as the share prices had fallen due to the pandemic.
- On March 23, 2020, SBI was trading at ₹ 183.20/share and you bought a hundred shares. So the total investment value is ₹18,320 (183.20 x 100).
- On March 8, 2021, you decided to sell the shares, SBI was trading at ₹ 389.6/share on that day. So now your total investment value would be ₹38,960 (389.6 x 100).
- Therefore the profit obtained from selling the shares is ₹38,960 – ₹18,320 = ₹ 20,640.
Before you invest in stocks, avoid the below mistakes that more than 90% of beginners do.
Bonus: 7 Mistakes Made by New Investors
There are numerous mistakes new investors make in the stock market, here are the most important ones:
- Buy or sell stocks when the news anchor says to!
- Investing the whole capital in one stock.
- Invest in a particular stock because a friend is investing.
- Lack of patience (want to make quickly)
- Buying when the stock is at its high and selling at its low.
- Expecting too many returns.
- Taking a loan to invest.