How to Invest in the Share Market?

Last Updated on 2 years by Mohit Pareek

How to Invest in the Share Market?

Investing in the stock market has been gaining popularity in recent years. Nevertheless, the proportion of people investing in the stock market is very low, especially in developing countries like India.

There are two major reasons for that.

Most people do not know how to invest in the stock market People are afraid of losing their money.

The stock market can give much higher returns than any other class of investment. But we cannot ignore its dark side. The dark side is that investing in the stock market is very risky.

While luck can be both made and lost, investing in stocks is a great way to grow wealth.

There is no doubt that investing in the stock market is the best way to stay ahead of inflation in the long term. But high returns bring with it risks. According to a popular study, “90% of investors lose money in the stock market.” So do not invest in the stock market only for the lure of high returns.

Before investing in the stock market, an investor needs to understand the risk associated with it. Equity investment is not like a fixed deposit. The investor earns a fixed interest rate on fixed deposits, but in stocks, the principal amount can both increase and decrease.

If you do not have enough knowledge to invest or you cannot control your emotions, you may lose all your money in the stock market.

But if you believe that you understand the risk of investing in the stock market and have the necessary risk-appetite, then only you should invest in the stock market.

If you want to invest in the stock market, (you are reading this article, this is obvious) then it is very important to learn how to invest in the stock market, why people lose money in the stock market and how to recover Are money.

Today in this article, we are going to discuss these details.

Please note that this article is a bit long. Make sure you read the article to the end as it will be worth reading it. Let’s start.

What is a share?

Shares in the general term used to describe the ownership of any company. When you buy a share of any company, you become the part-owner of that company.

Does that mean you get the right to sit next to Mukesh Ambani at Reliance’s shareholder meeting if you buy a share of Reliance Industries?

No, but you get the right to vote in that meeting. 

Is getting the right to vote in the shareholder’s meeting the primary reason to buy the share of that company?

No, the primary reason to buy a share of any company is that investor wants to earn a return on his investment. The return generally comes in two ways:

• The share price appreciates, which means it goes up: When the fundamental of a company is strong and the company is growing, then the share price of that company increase. In this situation, you can sell the share of that company and earn a profit on your investment.

• The share pays dividend: When a company earns profit, then it distributes its profit among its shareholders in the form of a dividend. Yet, there is no compulsion on the company to pay dividends to its shareholders.

Documents required to Invest in the Share Market?

If you want to invest in the share market, then there are few things which you need.

• Bank Statement
• Trading and Demat Account
• Computer/Laptop/Mobile
• Internet Connectivity

For opening a trading and Demat account, the following documents are required:

• PAN Card
• Aadhar Card
• Cancelled cheque/Bank Statement/Passbook
• Passport size photos

You can have saving account in any bank either a public bank or private bank.

Get all these documents ready as soon as possible. Apply for PAN Card as soon as possible if you don’t have (if you are 18 years old or above).

How to Invest in the Share Market?

Determine your goal

Why do you want to invest in the share market?

The main reason for everyone to invest in the share market is to earn money. But everyone has their own set of goal. Some of us want to create wealth through long-term investment, others want to earn from intraday trading. 

But the problem is that many of us never set any goal before we invest in the share market.

If investors invest in the share market without any clear goal, then the probability of losing money is very high.

Many people invest in the share market so that they can create wealth before retirement; some of us invest in the share market to become rich. Many people invest in the share market to earn a regular income from the shares in the form of dividend and short term capital gain.

Whatever your answer is, but the truth is that we all want to earn money from share market; we can’t afford to lose our hard-earned money. So, never invest in the share market without any clear goal.

So, before you invest in the share market, it is very necessary to set your goal. Whether you want to earn from intraday trading or you want to create wealth in long run?

Create an emergency fund

The main purpose of investment is to make your money work for you. If you want to make your money work hard for you, then you have to invest it for a longer period i.e. 5-10 years.

But life is not so easy. Unfortunate events can happen at any time, for which we may need money.

What will you do in that situation?

Either you have to sell your investment, or you have to borrow money and the third option is that you can utilise your savings.

In this panic situation if you sell your investment then it may be possible that you have to sell them in the loss. And if you borrow, you have to pay high interest.

It is a universal truth that whenever an investor sells his investment in panic, he always incurs a loss on his investment.

In both situations, the loss is yours.

That is why it is important to save some money and create an emergency fund before going to invest in the share market. It is recommended that your emergency fund should be equal to three to six months of your living expenses.

This emergency fund will also save you from selling your investments at a loss in bad times and will also prevent you from borrowing money at a high rate of interest.

Open a Demat Account

Do you know where a share is stored when you buy a company’s share from the share market? All these shares which you purchased are deposited in your Demat account.

What is a Demat Account?

The shares you buy and sell on the stock exchange are deposited in the Demat account. The shares which are stored in your Demat account are dematerialized (stored in electronic form) and not as physical shares.

When you buy shares, your broker credits your Demat account with the shares. These shares are reflected in the statement of your holdings. (You can view the details of shares purchased in your account).

When you sell shares in your Demat account, your account is debited (shares go out of your Demat account) and money is paid for the shares you have sold.

How to open a Demat account?

A Demat account can be opened with a depository participant, who may be a bank or stockbroker who has a license to do so. You need PAN card, Aadhar Card, savings bank account and cancelled cheque.

Learn the basics of the share market

There is a myth about the share market, that investment in share market is very complex, but actually, it is not as complex as it seems. One can learn the basics of the share market with constant and persistent efforts. Nowadays there are many such options available from where you can know everything about the share market.

Just remember, “Learning is more important than earning“

These are the following ways through which you can learn about the share market:

Reading:

Reading is the best way to learn. Read as many books related to share market and investment as you can. Apart from this, you also have to learn how to read the financial statements of a company.

Reading the financial statements gives you an idea of ​​the financial condition and performance of the company. By reading and researching financial statements, you get knowledge about the company, which helps you in investing in that company.

Take online courses:

Nowadays there are many free and paid online sites available on the internet which offers courses and certificates related to the share market. You can choose any of these courses.

There are also many blogs related to investing in the share market. You can follow any of these blogs of your choice and learn from them.

Remember: Never blindly follow any course, blog and YouTube channel. Do your research before investing in the share market.

Research the market:

If you want to become a successful investor then you have to constantly research the share market. You have to update yourself with news that affects the market.

The share market is also influenced by political, economic and global factors. So, you have to research how the market reacted to each event.

The best way to do your research is to choose one company. After that analyse the share price of that company for the last 5 to 10 years. By analysing, you will understand all those factors which are affecting the share price of that company.

Invest in Individual Stocks Gradually

It is very risky to invest in the share market at one go. So, never invest all your money at one go. It may happen that after your investment, share market fall. In this scenario, if you had invested all your savings then, first of all, it becomes very difficult to recover your money invested at a higher price and you will also lose the opportunity to buy shares at a lower price. 

On the other hand, if you invest in the share market gradually then you will have enough money for not only to recover from share market fluctuations but you will also earn money from these fluctuations.

Don’t forget to diversify

Many investors invest only in few companies or sectors which they think will grow in future.  If you have done your research and find out that any particular company or sector is going to give a huge return in future, then you can invest in that company or sectors.

But investing all your money only in that company or sector is not a good idea. Suppose, in case of any uncertainty or by the change in government policies if the business of that company or sectors is negatively affected then you may lose all your investments.

So, it is always advisable to diversify your investment. You need to invest in different companies and sectors so that in case of any loss in one sector, the profit of other sectors can compensate for it.

Why Investors Lose Money In Share Market?

There is not a single person who invested in the share market but never lost his money. Unfortunately, many investors lost their entire savings and never recovered their money.

According to popular research, 90% of investors lose money in the share market. Instead of earning income or profit, they lose their hard-earned money. Despite that, the number of investors investing in the share market is increasing day-by-day.

The research states that most of the person who loses their money in the share market is not the actual investors. They are traders who invest their money in intra-day trading without any real knowledge, trading skills and any long-term investment horizon.

But it doesn’t mean that the long-term investors never lose their money, they also lose money. Yet, the percentage of long-term investors loses money in the share market is very low. The reason is that, instead of earning from short-term volatility in the share market, long term investors focus on wealth creation in the long run.

No matter, whether the investors focus on long-term wealth creation or earning money from short-term volatility, there are some mistakes which both investors do while investing in the share market.

There are many reasons why investors lose money in the share market. Although knowing all those reasons and improving them is not a guarantee that the investor will never make any loss in the market, but it is guaranteed that the investors will be less likely to lose. Let’s take a detailed look at some of the major reasons.

Not doing enough research

Most of the investors never try to understand the business fundamentals, financial statements and future projections of the company in which they are investing. They simply invest in the shares only by comparing the share price. The main motive of these investors is to book profits as soon as possible.

On the other hand, many investors study financial statements compare business performance over the last few years. They research the scope of the business in future and the company policies to meet future challenges. After completing their research and study they decide whether to invest in the company or not.

Successful investors spend most of their time in research and study. They research about the business fundamentals; financial statements etc. of various companies. They invest for the long term duration and never try to book profit from short term fluctuations.

The reason is that if the fundamental of any company is sound, then the company’s share price might fluctuate in the short run but in the long duration, these companies will reward their long-term investors. Long-term investors believe in creating wealth in the long duration and this is the reasons, most of them create wealth and earn a lot of money in the share market.

Invest only as much as you can lose

When the first time I invested in the share market, the market was growing rapidly. I invested in shares for the first time, so a lot was new for me. Like many people, I invested almost all my savings to earn in the growing share market. For about 6 months, I benefited from the growing share market, but on the day of the budget announcement, the government came out with such policies that in the next 3 to 4 months, the prices of all my shares fell 30 to 40 per cent.

That day I came to know that invest only as much as you can lose in the share market.

Lack of Patience

An impatient person always makes mistakes. You can never make the right decision in a hurry. This also applies to the share market.

Many times investors buy quality shares but are not able to keep patience. Just buying quality shares is not sufficient; you have to trust in your investment decision. You have to give time to your investment to grow so that they can fetch you a good return. But unfortunately, this doesn’t happen; most investors get afraid of slight fluctuations in the share market and sell their shares in a hurry. 

Tips and Advice for Investing

Investment is simple but not easy, especially if you are investing for the first time.

Every person who invests in the share market or who wants to invest in the share market both has excitement to earn money but also there is a fear of losing their money.

This is why most people seek advice from others especially from relatives and friends. Many people invest in those shares which are been recommended by their friends and relatives.

Nowadays, there are tons of websites, journals, magazines and brokers who give us recommendations to invest in shares and funds. Most investors especially new one falls in these nets and follow these recommendations and invest their hard-earned money.

There are chances that most of these recommendations are either paid by the company whose shares are being recommended or these recommendations are based on a person’s own goal.

Every person has his or her set-of-goal. The shares suggested by the experts may be beneficial for most investors, but there is no guarantee that the suggestion will be beneficial for you too. Therefore, it would be better not to blindly invest by following these research suggestions. Invest in the share market only after you are fully satisfied with your decision.

Related: Why you should Ignore Investment advice from relatives and friends?

Lack of Diversification or Over Diversification

Many investors invest only in few companies or sectors which they think will grow in future.  If you have done your research and find out that any particular company or sector is going to give a huge return in future, then you can invest in that company or sectors.

But investing all your money only in that company or sector is not a good idea. Suppose, in case of any uncertainty or by the change in government policies if the business of that company or sectors is negatively affected then you may lose all your investments.

So, it is always advisable to diversify your investment. You need to invest in different companies and sectors so that in case of any loss in one sector, the profit of other sectors can compensate for it.

However, if you invest in too many companies, then it will result in over-diversification. Just like the lack of diversification is bad for your investment, over-diversification is also bad for your investment. If you invest in many companies, then it will become difficult for you to manage all your investments.

There is no such ideal number of companies to invest. If you are a new investor then you can select 20-25 companies from different sectors. Investing in 20-25 companies from different sectors will not only diversify your investments, but it also helps you to manage your investments.

Investment in Penny Stocks

Penny stocks are stocks that have a very low price. Most of the share price of penny stocks is in single digit. Their low price attracts a lot of investors especially the new investors to invest in these shares.

Many investors invest in penny stocks due to the very low price. Any person can acquire a large number of penny stocks with a small investment. Suppose, if an investor has Rs 1000/- in hand, then he thinks that it is better to buy 200 shares of Rs 5 and not 2 shares of Rs 500.

The volatility of penny stocks is high as compared to blue-chip companies. Due to the volatile nature of penny stocks, they are favoured by many investors. Investors want to get the advantage of its volatility and earn a lot of money.

My friend started investment in stock-market in 2017 when the Sensex was breaking records. During that time, penny stocks gave the return of 50%-500%. To earn more money from these shares, my friend put all his money in these stocks.

With the starting of 2018, the share market starts falling. The price of these penny stocks fell by 50-80% within a few months. My friend lost almost his entire capital in stock-market and told us that he will never invest a single penny in shares because stock-market is gambling and you can earn only if you are lucky.

This not only happened with my friend, but many investors also left the market after suffering such a big loss.

Suppose if he would have controlled his greed and invested in blue-chip companies then he might get a much lower return in 2017 but he would never have lost his capital in 2018. Blue-chip companies are less-risky. Their price doesn’t fluctuate so much. These companies also get affected by the news, emotions in the short term but long term these companies recover and give good returns to their investors. 

It is always suggested that never invest in shares of any company based on price because it is determined by various factors. You should analyse the company’s fundamentals, profit and loss account, balance sheet, prospects etc., and if you are satisfied that the company will be going to prosper and give a better return in future, then only invest in the shares of that company and invest for long term.

How to recover the money you lost in the share market?

People invest in the share market so that they can earn some extra income. But unfortunately, most of them lose their money. Loss in the share market doesn’t only affect us financially but also emotionally. No matter how expert you are, the loss in the share market can’t be avoided.

When investors lose money in the share market, either they get panic and leave the market or they start over-trading to recover all their losses.

Remember, if you leave the market then you will never get your money back. You will also lose the opportunity to create wealth from the share market in the long run. There is no doubt that after making a loss in the stock market; it is very difficult to invest more money in the same market.

Success in the share market is never met by denying, abandoning the market or by taking investment decision emotionally. If you want to become a successful investor, then you have to learn from losses and treat them as an opportunity to become a more knowledgeable investor.  

Here are a few things you can do to recover the loss in the stock market:

Accept Responsibility:

The first step you need is to accept responsibility for all your losses. It is very easy to blame others or your luck after losing money. But it was you who took all the investment decisions.

Even after taking investment advice from experts, you may lose your money. But in this situation also, it is not wise to blame them. The experts only recommend you, choosing experts and following their recommendations is all on your hand. Experts can only recommend you; they can’t force you either for investment or withdrawal your money.

If you want to become a successful investor, then, first of all, accept your responsibility. Learn from your mistakes and if possible try to learn investment skills. 

Never leave the market:

Most investors leave the market after suffering the loss and never dare to invest again. Entering and exiting the stock market is very easy. Anyone can enter and exit the stock market at any time. So, if you want to leave the market after suffering losses then neither your broker nor any policy can force you to stay invested. 

Will you get back your lost money by leaving the stock market?

No, The only way to recover your money is to remain invested in the market and search for the opportunity to not only recovers the lost money but also to earn decent money.

Avoid Over Trading:

After losing money, many people start over-trading to recover their losses. But this makes their situation worse. Whenever a person makes a loss in the stock market, most of the time he gets nervous and wants to recover his loss as soon as possible.

But over-trading is never good in the share market. You can’t make money by investing and selling any share randomly.   

Take some rest and forget all your loss and if possible avoid any investment or trading in the share market. Don’t try to time the market, instead of that wait for the right opportunity and then start your trading journey with a new hope.

Learn new trading skills

Most people lose money in the share market because they don’t know how to invest in the share market. It is very important to learn the right time to invest in the share market and the right time to redeem money.   

Picking the right share at the right time and the right valuation is the success mantra of the share market.

Having financial knowledge and trading skills are very important to earn money. You must invest your time in gaining financial knowledge and learning new trading skills.

If you develop a good understanding of the share market then the chances of earning money will increase and you don’t have to depend upon recommendations and tips.

Frequently Asked Questions (FAQ)

Conclusion

Entering into share-market is very easy and anyone can start investment from any amount. If you want to invest in the share market, then it is always recommended that before investing, you need to understand how the market work.

If you start investing in shares without understanding the market then there is more chance that you will lose your money.

There are many reasons why 90% of investors lose money. Forget profit, they lose their entire capital and start blaming the share market. Share-market always rewards those investors who invest their money after proper research, have patience and has trust in their decisions. 

I hope that you find this article is helpful. If you have any doubts or any recommendation, feel free to comment below.