If growing your wealth is the goal, investing in the share market is a good option. Stock market investments can bring substantially higher returns than, say, a fixed deposit at a bank. Of course, stock market investments also carry some risk. So you will need to think about how much financial risk you can bear. This will help you ascertain how to invest in stock market in a way that works for you.
How to invest in stock market: Direct vs indirect approach
There are two primary ways to invest in stocks:
- Buy securities directly on the stock exchange
- Invest indirectly by purchasing mutual fund units
Direct stock investment: When you invest in a company’s stock on the share market, you gain part-ownership of the company. As an owner, you may receive dividend and interest payments from the company. The amount received would depend on the number of shares you own. You may also receive bonus and rights issue shares at times.
To invest in stocks directly, you must understand how the stock market works. At the very least, you have to research thoroughly the stocks on your wish-list. Study their fundamentals—that is, their governance practices, competition pressure, growth potential, earnings, balance sheet, and so on. This requires that you commit both time and effort.
Focus also on diversifying your stock portfolio by adding sufficiently varied financial instruments. A well-diversified portfolio will help you to reach your financial goals while minimising risk.
Indirect investment: You could also invest indirectly by purchasing mutual fund units. Mutual funds collect money from numerous investors and invest this money in various financial securities. Equity-oriented mutual funds have higher exposure to equity stocks. They fetch higher returns than other mutual funds, though the risk is higher as well.
Mutual funds are generally diversified investment options. By making a small investment, you gain very small stakes in many companies. And since mutual funds have professional fund managers at the helm, you are spared the hassle of deciding which assets to allocate the money to.
How to invest in stock market: Tools required
To buy stocks directly on the stock exchange, you must apply for a demat account and a trading account. The trading account enables you to buy and sell securities on the stock exchange, while the demat account holds the security certificates in digital form. Once you have the accounts in place, link your bank savings account with them. Beginners to stock market investing could also open a 3-in-1 account which integrates demat, trading, and savings account in a single bundle. Also, look for larger brokers like Kotak Securities which have a research division and multiple trading platforms.
Mutual fund investors do not need a demat or a trading account. But it is helpful to have a demat account anyway. This reduces the number of times you have to complete the Know-Your-Customer (KYC) formalities when investing in different schemes. Plus, you would have a consolidated view of your mutual fund holdings.
The direct and indirect stock investment approaches have their pros and cons. If you are unsure about which approach to choose, try a bit of both. Start investing small amounts in mutual funds every month through a systematic investment plan (SIP). Simultaneously, select one or two stocks for investment in the stock market. See how things go before deciding how best to go about your stock investments.