How to start investing in stocks?

Starting investments in stocks is not easy, especially with recent market crash, it would seem more like gambling than investment. It is well known that the greatest stock market myth is that stock investing is a form of gambling.

This can not be more untrue.

Photo courtsety J Kelley

If you want to start investing in stock market, there is a great trepidation, because it looks extremely complex. There are so many terminologies like P/E ratio, dividend yield, bull and bear market etc which imply lots of learning new things. But still you want to start quickly, because everyone seems to be making good money from stock market, except you. You do not want to be left behind right!!

So how do you start? The first thing to ensure is that you have the temperament (essentially patience and hard-work) for direct stock investing, since not everyone is cut out for it and if your are not made for it, then it is not necessarily a bad thing. You can invest in other avenues like mutual fund which can give you exposure to stock investment.

Okay, so you still want to directly invest in stocks! Great, so let us get started step-by-step on how to start investing in stock market.

Trader Vs Investor

I discussed about this in my earlier post comparing with the analogy of trader, with housing agents and investor, with end-user of a house. In short,

Trader: A trader will buy stock and sell it within a very short time to make quick profit. A day-trader tries to do this with-in a single day, while a swing trader tries to do it across several days predicting the “swing” of the stock market.

Investor: On the other hand an investor puts his money for buying a business rather than looking for short term profits. The short term for a investor typically ranges from 2-3 years with an eye on 5-10 years of investment. As Value investment guru, Warren Buffet says

Our favourite holding period is forever.

I assume that you chose to be an investor rather than a trader. So how to start investing in a stock for long term investment?

The first key principle to keep in mind is that you should equate investing in stocks to buying a house property. The stock investments need similar amount of hard work and patience that you would do for buying that near perfect house in a near perfect locality at a reasonable price with a reasonable expected growth of the price of the house. So when you invest in stocks, it takes hard-work and patience to find a near perfect stock at a reasonable discounted price with a reasonable expected growth of the price of the stock.

Step-by-Step guide to start investing in stock market

Step 1: Get yourself a demat account. The simplest way is to call up your bank, who would surely help you in getting you a demat account. You can also visit your bank website to get details. For example, ICICI bank provides the demat services.

Some more details:

Demat account can be thought of similar to your saving bank account but instead you can keep your stock shares into the demat account. There are only two depositories in India (NSDL and CDSL), but to make it easy for you, they have many depository participants (similar to bank branches) across India. Also most probably your bank will be one of them and hence visiting your bank is the simplest way to open a demat account.

With a saving bank account, you take the pain of deposit/withdrawal of your money, but with demat account you need a broker (who is member of the stock exchange) who can buy/sell shares on your behalf. Almost all banks who offer demat services would have mechanism of assigning brokers (most would open a brokerage account as well). When you visit a bank for demat account, they will by default also open a brokerage account for you with the bank so that you can buy/sell the stocks. Keep in mind that brokerage services are not free and every broker will charge you some amount for brokerage.

There are hundreds of companies/banks offering demat/brokerage services, and it is very difficult to choose the best. The choice is typically based on brokerage fees and how frequently you intend to transact in stocks. If you search Google, you will find lot of people comparing brokers in India, for example, check this link for one such site.

My recommendation: As a long term investor, the actual brokerage charges can be recovered over a period of time and hence you should choose your bank (where you have saving account) for the demat account, since they can link your bank account, demat account and brokerage account all in one. Once you learn more, you can change your broker.

Step 2: It is important that you find yourself a mentor, be it a friend, relative or even an online blogger whom you have read consistently for a long period. Tipguy is one such person. A mentor typically is a great resource who can act as a springboard for you to enter the chaotic world of investing.

Step 3: Learn through the help/demo, about placing orders from your stock broker. It is important to learn the various terminologies used while buying stocks before you start your investment journey. As an example, the long term investor is looking for “delivery based” option, which imply that the shares needs to be delivered to the demat account. Also whether you want to place a “market” order (implying using whatever market price of the stock at buying time) or a “limit” order (transaction happens only if the market price satisfies the given limit). Here is how ICICI order page looks like:

It will take some time to understand these various terminologies and you have to be patient and get help from your mentor to learn these things.

Step 4: Now that you are all set to start your journey, you need to find the right stock to buy. This step is the biggest step since it involves:

• Understanding your goals of investment
• Understanding and accepting the risks involved and potential gain
• Learning to short-list the types of business you want to invest
• Learning to analyze the business to find potential winners as per your goals and risk profile
• Putting your money into the near perfect business stock
• Reviewing and re-analyzing your investment over a period of time.
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The problem in executing Step 4 is at multiple levels including the chaotic environment created by millions of stock related websites, newspapers, magazines and the media channels. Some tips to execute Step 4 are listed below:

• Read, Read and Read the excellent investment books. For e.g. The Little Book (Rs 189 only), The Dhando Investor, The Intelligent Investor (Rs 509), The New Buffetology. Also read excellent blogs like Tipguy, Jago Investor, SubraMoney, Value Investor, InvestingValues.


• Learn to separate the wheat from the chaff. Learn to skip the various emotions generated by the media related to market crashes, specific company issues etc. It is important to be aware of the latest happenings but also important to not get carried away by it.


• For at-least two years, invest only that much amount which you are willing to loose entirely. Think of this money as a course fee you are giving for learning stock investing.


• Invest only in minor amount, never with big amount in single shot. Although most value investor talk about “big bets in small number of stocks”, to begin with you should invest “small bets in small number of stocks”. I recommend not investing more than Rs 10K for the first two years and not more than 4 stocks. In the meantime you should read, read more and understand and review your investments.


• As Warren Buffet says “Wide diversification is only required when investors do not understand what they are doing”, so keep in mind, not to invest in more than 4-5 stocks while you are still learning and as your confidence and understanding grows you can devise your own mechanism of investing and you may remove this restriction.


• Also learn not only to buy, but when to sell as well.


• Keep in mind that similar to buying a house, there is no need to time the market for buying stocks. It entirely depends on available cash with you, the goal you have in mind, your risk profile and available stock at appropriate price that you are willing to pay.


• Stock buying is a very subjective matter and depends on the requirements of the person buying, so never put your money just because someone else has done. It is much better to donate the money to a charity than buying stocks based on hot tips.