How to invest in the share market?
In general, to invest in the stock market, you need to have an investment or Demat account. It’s also called a brokerage account. There are widely two types of brokers available in the Indian stock market, full-service broker and discount broker.
Full-service brokers provide advisory and trading facilities in stocks, commodities, and currencies. These types of brokers charge a certain percentage as a commission on the total amount of trade a client executes.
Discount brokers provide just a trading platform to investors but no advisory. The best part of opting for a discount broker is the low brokerage charge. Instead of charging a certain percentage of total trade value as the full-service brokers, discount brokers charge a fixed price, usually between Rs. 10-20 per trade executed on their platform. The charge is irrespective of the total amount a client invests. Over the last few years, many discount brokers have established themselves in the Indian stock market.
Our top 3 discount brokers are Zerodha, Upstox, and 5paisa.
Types of stocks to invest
In the stock market, there are mainly two types of stocks, common stocks, and preferred stocks.
When we hear people talk about stock in general, they are most likely referring to the common stocks. As a common shareholder, you are permitted to vote in shareholder meetings, and you are eligible to receive dividends. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If the company where you have invested goes bankrupt, you will receive the share of proceeds of liquidation only after all creditors and preferred shareholders have been paid.
Preferred stock comes with the same feature of common shares but usually doesn’t give you the voting right. With preferred stocks, you, as an investor, are usually guaranteed a fixed dividend forever.
Another advantage of preferred stock is, in the event of liquidation, the preferred shareholders will get dividends before common shareholder receives it.
Financial Instruments Traded in Stock Market
Equities or shares or stocks are the primary instrument that you intend to buy through a discount broker. This type of financial instrument gives you the ownership of a company.
Mutual funds are a pool of investors who invest in various financial instruments. Each investor is assigned units according to his/her investment amount and referred to as unitholders. Profits generated by the mutual funds are distributed among the investors in proportion to the units held by them.
Investors can buy or sell debt securities issued by corporations or governments. Bonds carry low risk as either a large corporation or the government borrows money from investors at an agreed interest rate for a specific tenure.
Derivatives are financial contracts whose value is derived from one or more underlying assets. Options, futures, forward, and swaps are common derivatives.