This the most common question in the minds of the beginners in the stock market. The truth is that there is no set benchmark of minimum or right amount to start investing in stock market. And you don’t need to be highly rich to start investing in the stock market.
While you will start scouting for stocks that interest you, you might see some as low as INR 1 and some going up to INR 2000. A low priced stock need not be a safer game-play than the one costing x times higher than that. But the question still remains, how much is the right amount. Here are some things that you should know.
Planning Your Portfolio
A portfolio is your collection of financial assets you invest in, this includes stocks, bonds and so on. Before you go ahead looking for stocks, decide which sectors you would like to invest in. It’s always better to go with the industry you have some knowledge about. But at the same time do not decide to put all your money in one place. Make an objective assessment of how much surplus money you have to judge how many different stocks you can buy. This is the money you won’t require in the next few years. It will help if one industry takes a downwards curve, then you have rest of your shares still protected.
Refer to a stock chart to take a call, if you are looking to invest in Indian market, you can refer to this one here. Additionally there are technical and fundamental scanners available to alert you about good investment/trading opportunities.
Go for a stock that is rising at a ‘steady’ rate. The emphasis is here on the word steady because anything rising too fast is risky, there is always a limit to which a stock will rise and after that it will fall. Also see if there are several others investing in your desired stock, a high volume stock would be a more healthy stock to buy.
Also avoid volatile stocks, you might identify these easily, they have several spikes on their graphs and change rapidly.
The advantage of stock portfolio diversification can be completely realized only when the portfolio holds minimum of 15 stocks of different companies. At this point the risk is diversified away to a good extent.
Size of Investment
While deciding how you should allocate your funds, it is important to understand the classification of stocks based on market capitalization, i.e. the product of current stock price and the company’s outstanding number of equity shares. If a company has 10,000,000 shares outstanding and its current share price is INR 7.We can calculate that company’s market capitalisation is Rs 70 million, or 10,000,000 shares x INR 7 per share.
Small Cap Stocks
Small cap stocks are companies with a market capitalization of less than 100 crore. Small cap companies have small revenue and client bases, and usually include the start-ups or companies in the early stage of development, hence holding a potential for growth.
A few examples of current small stock companies in India
Mid Cap Stocks
Mid-cap stocks are of companies with a market capitalization between INR 100 crore and INR 1000 crore. Mid caps lie between large cap stocks and small cap stocks in terms of the parameters like size, revenue and client base. They are usually suitable for long term investments.
Large Cap Stocks
And finally, Large Cap stocks are of companies with market capitalization over Rs.1000 crore. These are usually large and well-established companies that have a strong market presence and hence are likely to be considered as safe investments.
All the three type of stocks mentioned above come with their own set of risks and merits depending upon the time invested for. You can certainly mix and match your selection in your basket, depending upon the goals you have in mind for investment.
And after you have nailed down what stocks you would like to explore, it is now only upto the commission your preferred broker will charge to determine how much money do you need to start investing.
Paying the Brokerage
After deciding what stocks you want, you’ll now need to go to a licensed broker or a brokerage firm to buy them. Now, the amount required is only dependent on the commission charged by the brokerage firm you’ll choose. Broadly there are two types of brokerage firms
Full Service Brokerage Firms
A full service broker/brokerage firm provides the investor with a complete package of investment services, which includes recommendation on the securities, providing individualized advice and researching on particular issues through a dedicated salesperson. The firm charges the investor a premium in the form of commission which depends on the type of the share and amount being invested. A full service brokerage are best for those who are beginning to invest in the stock market and to those who don’t have time to work on the investment plan and research work.
The image above shows a few of the full service brokerage firms available in India, along with the different charges they levy.
Discount Brokerage Firms
These firms do not provide any kind of services other than just processing the orders and clearing the transactional issues. Hence the commissions charged by these firms are less compared to that of full service brokerage firms. These are more suited for the investors who have quite a lot of experience in trading in stock market and those who have time to research on the investing plans.
Even for choosing discount brokers, there are several options in India, some are shown in the above image. Most have a minimum account opening charge followed by a brokerage on every trade made through them.
After seeing the rates charged by the brokerage firms shown in both the images, you might be realizing what we said initially was true. You don’t need a huge amount of money to start investing with.
For doing market analysis you can refer to online portals like TradersCockpit.com and trade using discount brokerages that can help you to decide on what to trade, and if we go by the trend in the West discount brokers is the most effective way to trade.
5 Most Important Tips for Beginners
- Invest only your surplus funds: If you want to take risk in the volatile market, then see whether you have surplus funds to spare. It is not you lose money in the present scenario. The lessons learned will help to earn fruits in near feature. However it is advised not to invest more than 10-15% of the income of any individual.
- Don’t buy all at once: To maximize your profits, stage your buys slowly on time, work on your orders and try to get best price for it over time.
- Buy stocks in demand, not brands: Investors can’t alter the orders once made, so do research and focus on the stocks in demand rather than brands.
- Diversify and control risk: Try to diversify your portfolio so that risk is minimized, this helps in staying alive even if market downfalls.
- Do homework on your preferred stocks: Before you buy any stock it is very important to do basic ground work on that stock such as knowing its historical price etc.