How to buy shares of a company: A guide on how to select the right stock

How to buy shares of a company: Introduction

Typically, in India, the stock market fluctuates more with news and sometimes even with rumors. You hear a fake rumor today about a big businessman being rushed to the hospital and you will notice the market crashing the next day. At the same time, if good news is passed on, for example, a company being merged with a million-dollar industry, you will not be surprised to see an uprise in the market’s performance the next day. It is as if the Stock market is a person expressing their emotions to news around them. But can everyone trade in this volatile market? Let us find out.

Summary in Brief

• How to buy stocks in the stock market?
• Can you buy shares without a DEMAT account?
• What is the role of a broker?
• How should an investor pick a stock?
• FAQs

How to buy stocks in the stock market?

Well, one of the basic and foremost steps to buying a share is to open a DEMAT account for your profile, also known as a dematerialization account.  Demat accounts came into the picture to eliminate various problems like theft, fake and transfer delays that were the limitations of physical certificates, and instead, the electronic book-entry system was introduced for holding and transferring securities. Now to expedite the dematerialization process, the SEBI has mandated the compulsory settlement of trade in Demat form. At present only two depositories are registered with the SEBI- National securities depository Limited (NSDL) and Central depository services (India) Limited (CDSL). 

So, now let’s understand the process of buying stock in the stock market.

• Prior to opening a Demat account, it is necessary to obtain a PAN card. It's a 10-digit alphanumeric number which is essential for any online transaction to be processed.
• Then comes the opening of a Demat account. You can easily open a Demat account online through online investment platforms and brokerage firms.
• Then it would help if you found an intermediary to transact stock in the stock exchange, basically, select a  broker.
• Link your bank account with the broker. It is through this bank account that you can process payments to buy shares and receive the sale proceeds.
• Investors looking to make significant investments also need to obtain a Unique Identification Number or UIN.
• Once this process is completed, you shall receive an activation mail along with your user id and password, and then you may watchlist your desired shares and start investing.

Can you Buy Shares without a DEMAT Account?

Well, earlier there was the concept of physical shares. It is however highly rare these days to find someone who may have kept existing physical shares because it comes with a bag of disadvantages. For starters, by using your demat account you can conveniently manage your shares and transactions from anywhere, unlike in the physical form. Stamp duty needs to be paid on your physical certificates. The risk of theft, loss, forgery, and damages is high compared to a digital format. Due to the elimination of paperwork, the time required for completing a transaction is low in a demat form unlike in the physical form. This makes the process of dematerialization essential and fundamental to trade in the stock market. It is important to note that physical shares are not continued now and you cannot trade them for cash so eventually you shall have to convert them into electronic shares.

What is the role of a broker?

As explained in the process for dematerialization earlier, an investor needs to find a Depository Participant (DP) that offers Demat services like Sharekhan, Zerodha, India Infoline, and many more. These brokers shall help you get access to trade in the stock market to either purchase or sell your electronic shares. Even having a demat account, you do not have access to directly trading in the stock market but only through a broker that you can do it. Most of them also provide you with tips and tricks to invest in the stock market and help your transition to invest in the stock market a lot easier. For providing these services they charge a small cut from your profits made in the stock market which is why choosing the best broker for your profile is very important.

How should an Investor Pick a Stock?

Well, there are various variables to decide before you move to purchase stocks to make profits. 

Step 1: Decide the investment duration

One of the most important would be the duration for which you wish to purchase the stocks. Holding a stock for the correct amount of time is very important and you need to decide which type of investing you are willing to do. 

Mainly there are 3 types: Intra-day trading, medium-term trading, and long-term trading.

Intra-day trading: It refers to purchasing and selling the stock on the same day itself and you do not get an option to hold the stocks after that market day and sell at the closing price if not sold already.

Medium-term trading: a system that stretches from a week to a month. You need to have patience in this term and wait for the right moment to sell the shares. 

Long-term trading: It refers to the trading period of a year or more. Here, investing is in the mentality that you will not require that money for a good amount of time and wait for returns. 

Not to forget that over time you shall receive all the dividends from the company as well. Short-term or Intra-day systems are risky and require continuous monitoring of the stocks during the trading day. Medium-term trading needs patience and waiting for the right moment to exit and long-term trading is leaving your investment alone for a long time.

Following is a table to understand the parameters of buying a stock as per time duration:

Step 2: Choose the right time and the right sector to invest

After you have narrowed down your type of investment based on the duration, your next objection is to select the perfect time and sector of stock. 

A top-down approach helps us select the perfect sector of stock to invest in and a common measure to analyze is the Economy, Industry, and Company (EIC) approach. By looking at the overall sector, for example, Bank NIFTY, you shall understand if the banking stocks are doing well or not on the market day. This helps you narrow down your sector that shall get you good returns.

There are other various approaches like technical analysis where you see charts of the share and analyze the price, volume, and other key variables you can predict or even pin down your prediction of good-performing stocks. 

There is a fundamental approach as well where based on the financial statements passed on by the company you predict the performance of the company in the coming quarters and take a call on your investment. 

The news-based investment is also there, where a piece of particular news released in the market sets the tone of the market. For example, if the currency of the Nation is taking a hit, then all the IT companies will have a negative impact on the stock market as the majority of the companies get their return from foreign companies. If oil prices change around the world, then paint companies like Asian paints will have a negative impact. 

Important things to remember:

1. Do Not Blindly Follow Hot Tips

No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly. 

2. Eliminate Loser Stocks from Portfolio 

There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses. 

3. Don't Exceed Your Investment Budget Abruptly 

While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares.