We asked all the stupid questions about investing in stocks, so you don't have to
Answered by the wolves of Dalal Street
The biggest takeaway from my moral science lectures was ‘ignorance is bliss’. This blissfulness sheltered me from the big bulls of the Bombay Stock Exchange and share market all my life. The fluctuating red and green lines looked more complex than Christopher Nolan’s universe. My disinterest in investing in the stock market also stems from the lack of a risk-taking appetite at home. Nobody in my household is a khatron ke khiladi when it comes to investing. I think thrice before investing in any property while playing Monopoly.
I can’t deny the fact that it’s a privilege not to bear any major financial responsibility. The only time I face my fears is on my annual date with Dad’s financial advisor. He forces me to read some number-heavy documents, promises to make me filthy rich one day, and a chunk of my hard-earned money leaves my savings account for a faraway staycation to grow at a sloth’s pace. My financial life, as I knew it, would go on this way, I thought.
And then Scam 1992 released last year. It scammed all my friends. They were greatly influenced by Harshad Mehta, and his gyaan, “Risk hai toh ishq hai”. Some befriended a certain Motilal Oswal, and most upgraded to newer denominations: stocks, shares, bitcoins and what not.
According to experts, only 2% of Indians are investing in the stock market, although ours is Asia’s third largest economy away from equity markets. Last year, amidst a crashing economy and crumbling job market, money management was becoming a part of most brunch conversations.
“When I got a pay cut at my job, and realised that my savings were rising at a very low rate of interest, I had to take the risk of smart investing in volatile markets,” says Rafaa Dalvi, a marketing professional who now dabbles in stocks.
Deepayan Choudhury found himself grappling with stock market lingo after the untimely demise of his father. “He invested around Rs 10 lakh in the last 10 years but didn’t really track it, and the money was stagnating there. When I had to look at all the financial documents, I had no choice but to enter the market. With my surface-level understanding and help from financial advisors, in the last two years, I converted it to over Rs 15 lakh,” he says.
Active investor accounts rose by a record 10.4 million in 2020, according to the data from Reserve Bank of India.
To shed my fear of high risk, I called Sharbani Talukdar, a professor of economics, who explained how investing in the stock market at a young age is the smartest thing one can do. “As you grow older, you have more responsibilities. Your ability to take risks reduces. When you’re younger, you may have limited money to invest, but young blood is also more daring. Start small to acquaint yourself with the workings of the market,” she says.
She added that the lack of knowledge and trust keeps many away from this financial instrument, and educating ourselves is the first step.
Investing in the stock market, simplified
Do I need to be a pro at maths to start investing in the stock market?
No, but you need a basic understanding of profit and loss, and some common sense. A financial advisor you trust will calm your nerves. Numbers on the market do get complex, and the movements are best tracked by professionals. The last thing you want to do is blindly follow your friend’s or family member’s advice.
Can I use my existing bank account? Or will I have to do a mountain of paperwork to start a new one?
Yes, you need a trading account, also known as a Demat account, but you’ll be overjoyed to know that there won’t be days and weeks of paperwork involved. Those days are gone. The dematerialised account lets you hold shares and securities in an electronic format.
You can start this account from your phone, using the net-banking app of your current bank. You just need a copy of your PAN card, Aadhar Card, mobile number, email ID and a cancelled cheque to link your bank to the Demat account. Most banks will set up your new account in less than a week.
Where do I go after my account is all set? Where do I buy or sell the shares? Are there apps, sites or actual offices?
On apps like Small Case and Zerodha, you can sell or buy stocks. In fact, you can also use your Demat account to check the prices before investing. Small Cases is the best place for freshers in the market, says Dalvi.
“I didn’t have the time or enough knowledge to track the market all day. Small Case clubs together a group of companies under categories like chemicals, pharmaceuticals, FMCG, and also has best-performing categories like Nifty 50, Nifty 100. I can choose the category I want to invest in, and the app does the rest for me. It’s easier,” he says.
What are the various categories of companies to invest in?
Companies are categorised under large-cap companies, mid-cap companies and small-cap companies. Large-cap companies are nationally recognised, and deal in high-quality and widely accepted products. They are also called blue-chip companies. When investing in the stock market, it’s safest to start here. Eg: Reliance, TCS, Infosys, Hindustan Unilever, ITC and so on.
Mid-cap companies aren’t as major as the big-cap companies, like Polycab, Relaxo footwear, and so on. Small-cap companies are generally start-ups, and the risk is far higher.
The various product categories of companies include banking, chemicals, pharmaceuticals, FMCG, automobiles telecommunication, and public sector undertakings. Use your common sense to find out what’s in demand. For instance, during the pandemic, pharmaceutical companies have witnessed a boom. People investing in them have reaped higher returns.
If one doesn’t have prior experience in investing (mutual funds or SIP schemes), would you advise them to enter the world of stocks and shares?
Mutual fund gives you a trailer of the risk, but share market is the actual picture. Ultimately, it comes down to your risk appetite.
In 2017, Shreya Waghmare, a Mumbai-based engineer, swam straight into the cryptocurrency market, without making any pit-stops at low-risk mutual funds or even the traditional share market.
“I had some money I didn’t mind risking at that point in life. I was ready to lose that sum as well. It gave me enough profit to use for my shaadi shopping, including my lehenga, last year.”
Don’t judge me, but is there really no way to play it safe in the share market?
Sorry to burst your bubble, but investing in the stock market is a risk you should take only if you have the courage to see your savings depreciate every now and then.
Just remember, “You can’t time the market, but if you can give time to the market, you’ll be pleasantly surprised”.
Risks come with the territory: higher the expected return, greater is the risk. Long-term investments (more than five years) are fairly safer. Cushion your losses by diversifying your investments. You have the world of financial instruments at your disposal: FD, RD, SIP, SWP, mutual funds, share market, cryptocurrency, LIC and so on. Build your financial portfolio by investing your money across multiple places. Whatever sum you have, divide it into parts and save.
What are the biggest risks in this risky venture?
The biggest risks in investing is not investing at all. While this sounds counter-intuitive, not investing your money is making you poorer and that’s a huge risk.
Why? Because of inflation.
Things around us are getting more expensive, and our money needs to grow at a rate that beats inflation in order for us to be able to continue to afford the things we need.
Is there an age criteria to start investing? When’s a good time to start trading?
Unlike most things in life, investing follows the age no bar policy. In fact, even individuals under the age of 18 can invest in the stock market by opening a Demat account with documents provided by a parent or guardian.
The earlier you start trading, the better, especially in a middle-class family. In middle-class families, you’ll have to think of taking loans for higher education as well. Start small, as low as Rs 5,000 for a chance to see your money grow. It’s not about being money-minded, it’s about having the freedom to do the things you want to do.
“I saw my father invest when I was growing up. So when I turned 18, I started taking an interest too. I invested Rs 5,000 and there are ups and downs, but I am here for a long-term gain, so I don’t get paranoid. I love to see my money grow without me doing much from my end,” says 19-year-old Vrinda Rawal.
Starting young helps you when you’re in your 30s. You’ll already have learnt from your mistakes, and be more aware of market movements.
Will I have to wake up every day and track these movements?
Not unless you want to get addicted to the market spiral. There are two kinds of investing in stock markets: intraday trading and long-term investing. Intraday trading, in simplest terms, is plain gambling. You invest money in the morning, and you find out if you made profit or loss at the end of the day. In these cases, if you’re a beginner, switching on news channels like CNBC in the morning around 8.30am helps. They make daily predictions and simplify the trends.
In long-term investments, it’s best to not track your stocks daily. In fact, check once every three months to avoid panic buying and selling.
As a fresher, what’s a healthy amount of money to start investing with in volatile markets?
Honestly, nothing comes with guarantee in the share market. Freshers can enter the share market by investing in blue-chip companies to avoid windfall losses. The amount to start investing depends upon the capacity of the investor to take the risk in the market.
If the worst case scenario occurs, and I have unforeseen expenses and all my money is stuck in the share market, what’s my safety net?
Two words: Emergency corpus. This is your “peace of mind” fund in case your income sources get cut off or you have sudden large unexpected expenses. The rule of thumb here is to maintain three-six months worth of fixed expenses in an easy-to-access place (your savings bank account is just fine).
For instance, if you spend Rs 30,000 a month on rent, food and utilities, maintain Rs 90,000 to Rs 1.8 lakh at all times in your emergency corpus, in case the need arises.
Do I need to take a loan to invest?
Rookie mistake. If you need to take a loan, we’d advise you avoid investing in high-risk markets just yet. There is no guarantee of any returns in the market. An investor should always hope for the best and be prepared for the worst.
Any unforeseen event can affect the share market. The pandemic is the biggest example.
Loans are expensive, and you are often paying a higher rate of interest than what you are earning on your investments. This is simple math: if I take a loan that charges me 10% interest, but I’m earning 8% on my investment, I’m actually losing money.
Terms to know:
Capital: The amount of money you use to start a business or to invest, etc. so that you earn more money (interest) on it.
Broker house: Organisations have the license to buy or sell stocks. They act as middle-men and help you with the transactions. They also provide you with financial advice. Examples of prominent broker houses in India are Angel Securities, Share Khan, ICICI Securities, HDFC Securities and Kotak Securities.
Liquidity: The act of selling your stocks at any time with a nominal transaction fee to get the sum back in your savings account.
Share: A share and stock refer to the same thing. It’s a piece of ownership in a company. If I own stock in, let’s say, Apple, I am a shareholder of Apple.
Bond: When you buy a bond, you are lending money to the issuer (this could be the government, or a company), who then pays you back with interest over a fixed period of time. A bond is known as a fixed
income investment, since you get fixed interest payments back as the purchaser of the bond.
For example, you invest in a Rs 10,000 bond with 6% interest for a four-year period. You will get Rs 600 paid out every year as interest.
Now before you jump into the market, personally, I’d recommend listening to ‘Cake By The Ocean’, and telling yourself, “You’re movin’ so carefully, let’s start livin’ dangerously.“