“Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.” –The Fourth Law of Gold from “The Richest Man in Babylon”.
In story form, “The Richest Man in Babylon” outlined all the principles needed to manage debts, get out of debt, how to put money away, and how to invest it wisely. It was first published in 1920; nine years before the worst day in US economic history when the stock market crashed so far that it began the Great Depression. Though the US was the main country affected by this economic nose-dive, repercussions were felt through the rest of the world, including India.
On that day, people jumped to their deaths from tall buildings, while others became extremely depressed as they watched their savings and investments disappear more rapidly than they had earned them. Though it was a day of great mourning, it had a silver lining. The US government put programs and policies in place to prevent that from ever happening again.
Trading in the stock market can be a very risky venture, especially if you do not understand what you are doing or you let someone else, who does not have the skill needed to help you keep your gold, or rather, money. No matter where you invest or what you invest in, you must keep your wits about you. Why? There are people in the investment business who only want your money and will tell you several things to “convince” you that you must make certain investments.
After reading this guide…well, you get the picture, right? Blah, blah, blah…get the basics…take it further; you know the drill. Bottom line, take your own risk when investing online and learn what you want if you want to advance to a higher level. That’s the entire jist of it, and if you take the initiative, that’s up to you.
What will you learn here? For one, you get treated to a brief overview of India’s trading history…you are told what the Indian stock exchanges are…you learn what you need to do to trade online in India…and finally, you are shown how to make money with online trading. Regardless of where you live, you can trade online in stocks from any country that allows foreign investors. Once you read this guide, do not make the mistake of thinking you know everything there is to know about investing, because baby, you are just at the very tip of the beginning!
Where Did Online Trading In India Start?
Silver coins may not have started the trade industry for India, but it did help create a formal system of trade starting around the year 600 BCE. Punch marked silver coins were minted by the Mahajanapadas, otherwise known as ancient Indian kingdoms. This allowed trade with other countries to flourish and expand greatly, building the foundations for a robust economy. Within India itself, however, bartering was still the preferred method of procuring goods and services, and each village was a complete economic unit; there was no need for trade outside these units, nor was a need for using the kingdom-issued coins.
This all changed when India became unified under one empire around 321 BCE. Economic and political change created improved infrastructures throughout India, establishing trade routes and creating the wealthiest economy of the known world. This continued for roughly 1500 years. Asia was THE top economic super power of the age, with a Gross Domestic Product (GDP) of 32.9% share. By the 18th century, that had dwindled to just 24.4%.
What About East India Trading Companies?
During this time, Europe struggled to stay afloat and sell one of their only exports, which was British Broadcloth. Compared to India’s exports, this was the equivalency of trying to sell rags to kings. European trade had stagnated and they could not boast the spices, lavish cloth and other gifts that India could. Not to be outdone, they decided they wanted a part of this wealth, or rather, all of it, and set out to form what would become the beginning of the end of India’s great wealth and trade system.
The merchants of Great Britain, after receiving the Queen’s approval, formed a company that would trade much of India’s textiles and exports to the rest of the world. Several other countries, like Denmark and France, became a part of this company to become a mega-corporation that had more power than it probably needed.
We Move Into The Mid-18th Century...
The wealth of India continued well into the mid-18th century, in spite of the East India Trading Companies and their systematic takeover. Talk about resiliency, huh? However, because India had such large wealth and Europe did not, India was in a position to create and enforce trade terms. They were in charge and able to call the shots, while Europe still struggled to gain a foothold in the world’s economy.
India had the largest economy, followed by Manchu China and then Western Europe. Unfortunately, disaster struck India towards the end of the 18th century with a famine on the east coast, which killed up to 5% of the national population.
Incoming! Here Comes The British Take Over
By this time, India’s ruling force had disintegrated so much that they were ripe for the British to come in and take over. In 1765, the East India Trading Company gained the right to collect revenue from Bengal, which let them stop trading gold and silver. Additional fines and levies allowed Britain a stronger foothold in India, ripening the conditions for them to come in and take over their entire country. India’s reputation and wealth were lost forever, and in the years to come, their entire economy would collapse and rise several times. But their former glory would be no more.
What Happened Next With Indian Stock Exchanges?
The National Stock Exchange (NSE) is the largest exchange in India, and the 9th largest exchange in the world in terms of number of trades and turnover of trades. In fact, the NSE trades over US$1.59 trillion with over 1500 companies listed, as of December 2010. Among these companies are GlaxoSmithKline Pharmaceuticals, Federal Bank, Indian Oil Corporation and Shipping Corporation of India. NSE contains several markets within the exchange, including Equity, Futures and Options, Currency Futures and more, which gives a variety of options when looking to trade in India.
The exchange is owned by a combination of certain banks, insurance companies and other financial institutions, but is managed separately. This is pretty impressive, considering that it only became a company in 1993, and recognized as an exchange in early 1994.
On the other hand, the Bombay Stock Exchange (BSE) is the oldest exchange in Asia, getting its start in the 1850s when five brokers met by Mumbai’s town hall under some banyan trees. As the number of brokers meeting together increased, the meeting places changed, and kept changing, until they became an official organization in 1875. In 1986, they were able to analyze stocks and make predictions based on their new SENSEX technology. They now use this index to trade futures contracts, as well as other types of trades. 1995 saw a switch to a fully electronic trading system, which only took 50 days for transition!
The BSE trades in over 6000 companies, with Infosys, KS Oils and Union Bank of India among the elite companies. Trade volume on the BSE is about US$1.63 trillion, making it the 8th largest stock exchange in the world.
India actually has about 22 stock exchanges, with the major exchanges in the larger cities. However, many of these lack credibility in the financial world. The Bangalore Stock Exchange (BgSE), located in the same city, lists several “seasoned” corporations across different industries. Listed on this exchange are about 314 companies.
Other exchanges include the Delhi and Calcutta stock exchanges, each doing about the same amount of business. If you want to invest in Indian companies, the best ones are the two main stock exchanges, because there is less risk with the companies listed on either one.
When investing in the stock market, the most common type of trades you will make are equity trades. These are shares in a company, or equity, and the process to trade equity is fairly simple once you have your accounts set up, buy as many shares as you want through an online or offline brokerage.
To make money, you must sell your shares for more than you paid for them. It is a rather “duh” revelation, don’t you think? You would be surprised at how many people actually miss this important, yet simple, point. Typically, when the market is said to be “high”, that means that more people are buying and selling, with people paying more for their shares than they are worth.
The risk with equity trades depends on how stable the company you invest in is. Most start-up companies are very risky ventures, but they have the most potential for high earnings and growth. Companies that have been around for a very long time are pretty stable, but there is not the potential for high earnings. However, if you want a stable income from your investments, these are the companies to look at.
Then there are those companies that are a mix, which means that if they still have room to grow, you have the potential to make a lot of money with them still. But, since they are also stable companies, then you can also make an income. A good portfolio (a folder of sorts with all your investments inside) will include investments with all three of these company types.
When you buy bonds, you are basically loaning your money to a specific organization at a certain interest rate on your principal. They are mostly available from the government or local municipality that you reside in, and are available in certain year intervals. For example, you can buy a 10-year bond, meaning that your money would be payable, plus interest, at the end of the 10-year period. However, one caveat is that you must be a non-resident Indian to buy Indian government bonds.
Bonds are not very risky unless the government and economy takes a severe nose-dive. In that case, you may want to keep your paddles, because you will be up a creek without them.
FOREX is an acronym that simply means “foreign exchange”, and it represents currency contracts traded on the market. The basic process involves trading currency pairs, using the principal amount (the amount you have to buy with) and the exchange rate agreed upon. Making money with this type of trade is almost as simple as the process itself, buy low and sell high. How do you do that? If the exchange rate is at a certain price when you buy, but then it goes up and you sell, you will end up making money.
When trading with Forex, these charts will help you analyze the right time to buy or sell, and it gives you a general idea of how the market is really doing.
This is a particular risky type of trade and, while you can make a lot of money, you can also lose a lot of money.
Trading in the Forex market used to be reserved only for a lucky few who knew people on the “inside”, such as brokers or bankers. Everyone else had to settle with trying to make money in the regular stock market. Some people got upset with this and decided to challenge this notion by creating an online trading platform available to more investors.
eToro-Forex is the brain-child of this challenge, which allows the average investor a way in to trading in the Forex market. Like other Forex trading platforms, it allows you to buy and sell currencies without complicated lingo or terms. For anyone who has a basic knowledge of market terms, this platform would be easy to use and operate on a daily basis. If you want to trade in Forex, you may want to check out the eToro platform.
When trading in any country, you need certain things to make successful trades. A bank account would be helpful, as well as a trading account somewhere and a way to buy and sell shares or other investment types. Specific items you need are specific to the country you are trading in. In India, you will need:
- Bank account with any major financial institution
- Demat account
- Online trading account
Demat (no, it is not slang for “the mat”) is an abbreviation for the term “dematerialized”, and it simply means to transfer documents into electronic form. It is just a fancy term for an electronic account. But what is it and why do you need one? Well, for one reason, it works almost like a social security number, but you can only use it to buy and sell stocks. The second reason is that this replaces the shares or sheaf documents, as was common in India before everything became electronic. Not having a demat account means you will not be able to invest in the stock market. Most banks should be able to help you set one up.
This is standard for any country you want to buy and sell stocks in. If you want to trade online, does it not make sense to have an online trading account? Everything else is online; why not trading shares? If you want to trade online, you will need an online trading account. But which one should you go with? Obviously, if you want to trade in India, the best thing to do would be an online brokerage or other trading company registered to do business in India.
Look for a site that will allow you to make your own trades if you desire, or will give you step-by-step guidance if that is what you need. You will also want a site that can give you all the information you need to perform company research so you can make an informed decision before putting any money down. Sharekhan, http://www.sharekhan.com/stock-market/11/home.html, is one such site, as they have different levels of investing for investors of all experience levels. They also have resources to help you learn how to make money at investing and beyond, so that you can make the most of your money.
Other sites that deal with online trading should be evaluated carefully. Some so-called online trading sites are little more than scams, so be careful what you choose.
Learn this basic formula and you can make trades in any country that allows foreign investors: money exchanged + shares issued = successful trades. Any basic trade uses this formula, and has since the beginning of the stock market. The confusion lies in the various terms and procedures each country has. When you learn these, you are well on your way to trading in India.
Most terms that you find in the Indian trading arena are the same across the globe, which are explained on many websites such as http://www.investopedia.com or http://www.sharegyan.com/glossary-financial-terms/. Specific terms and definitions include, but are not limited to:
· BSE — Bombay Stock Exchange, the oldest stock exchange in Asia.
· BSE SENSEX — An index used on the BSE that tracks the average stock prices of 30 companies in India.
· Demat—Otherwise known as “dematerialized”, this means that paper shares were converted over to an electronic system.
· Depository Participant (DP) — The representative of the depository system that maintains accounts according to the SEBI.
· NSE — National Stock Exchange of India, the 9th largest stock exchange in the world.
· RBI — Reserve Bank of India
· SEBI — Securities and Exchange Board of India
Let’s start at the beginning, shall we? To trade online in India, you must first have a bank account with some money actually sitting in your account. Obviously, if you have no money, you cannot make investments and you will not be able to trade anything. So, you should have the bare minimum for trading in your bank account. Once you have that, you can move on.
Next, you should sign up for a “Demat account”, as mentioned earlier. You cannot make trades without one, as it is a bit like a social security number that only allows you to buy and sell stocks. Check with your banker or DP, as they will either sign you up for an account or direct you in the right direction.
After putting these two accounts into place, the last thing you need is an online trading account. Find the one that is right for you and get busy!
Most trading, whether online or off, depends on a broker to make the trades on your behalf, so you need one who is honest and working for you, rather than himself. Unfortunately, it is rather difficult to find one in the financial industry. But it is not impossible, though while you are looking, you may think so. Chin up! There are two qualities of a good brokerage that you can look for that are qualities of all honest brokers and/or brokerages.
When you shop for a used car, what does the used car salesperson do? They push you into buying a car that you cannot afford, do not want, and couldn’t pay for anyway. But, most of the time, you get stuck with the car, all the while cursing and complaining about the car salesperson and the company. The same rings true with brokers and the companies they work for. A good and honest brokerage will not use pressure to get you to invest in investments that you do not understand, nor do you want. Rather, the broker will show you different options and will help you make a decision based on your goals and needs versus their own goals or needs.
A good broker will put your needs first. They will not try to fund their car payments or their three-week trip to Spain. Instead, they will take into account what you need and help you come up with a tailored plan based on you, not themselves. Your portfolio of investments should reflect what you want and need. If the proposed investment plan does not suit your needs and the broker does not budge, run the other direction—quick!
No matter what country you are trading in, you must adhere to certain rules and regulations of the country. India, before 1991, did not have set rules or regulations for investing; foreign or local investors alike. Since that time, SEBI has put several standardized rules in place to help equalize the market and create more national revenue.
This type of trade used to be illegal in India, but later rules have softened to allow resident Indians to convert Rupees to USD up to $200,000 without providing an explanation. Though this seems to be a pain, it is actually beneficial, because pairing other currencies with Indian Rupees is not a popular practice, so it becomes easier to trade with converted currencies. The “gotcha” part of this rule is that you cannot use your converted currency to trade in the Forex market. Of course, there are loopholes around everything, and this is no exception.
Non-resident Indians and resident Indians have little to no restriction on Indian trades, except maybe the obvious; don’t use insider trading to make gains, as this could be just a smidge illegal. Other than that, you have little trade restrictions. On the other hand, if you have absolutely no ties to India via bloodlines, then you have more restrictions.
India has issued American/Global Depository Receipt to the US and European markets as an attempt to raise money in foreign capital markets. If you want to invest in the Indian market, then you will need to go through these receipts.
So what should you invest in, and when should you invest, providing you know what you're doing? There are volumes of information on these topics that say the same thing: “We don’t really know, but we want you to think we do, so we are going to use large words and confusing terms to trip you up. This way, you will trust us enough to give us your money.”
Of course, no one can tell you what to trade or when to trade, as this is completely up to you. Basically, making trades at certain times can either give you more wealth or take away some, or all, of your wealth. If you follow a basic pattern, you generally can make more money in the long term.
Reading about companies may not sound like your idea of fun, and it probably is not necessary. When you want to invest in a certain company, the only data you really need for the company includes:
- Total revenue
- Total profits
- Total expenses
- Assets and liabilities
- Expected growth
- Share price and expected rate of return on your money
This information is used to determine the health of the company. If profits are much lower than revenue, the financial health is considered poor and should be avoided. However, if there are extenuating circumstances that may have lowered profits for one year, then look back to other years. If this trend continues, avoid the company. But if this is not the trend, look into other factors to determine the overall health of the company.
Expected growth is another determining factor when choosing a company to invest in. If there are no new products or services being developed, now or in the future, then the company will stagnate, leaving you with little to no income or rate of return. However, if new products are on the horizon, you may just have found a company that can make you a lot of money in the coming months!
Starting Out In The Game...Buying and Selling
When you buy and sell is up to you, but there are some things you should remember beforehand so you can keep your money longer. Day trading is a term that means to sell stocks the very same day you buy them, with the intention that you will make a lot of money. Some people make this a full time job, because of how much you have to watch stock prices. Most people, however, do not have time to do this so hanging on to your stocks may be better for you to do.
There is a story of a man who, in March of 1962, invested US$3,200 in a particular company through his broker. He thought he was doing the right thing by hanging on these shares, even though his broker kept telling him he should sell them. During that same summer, his broker died and did not leave a successor for the account. Thirty years later, his shares were worth more than US$200,000! He didn’t realize that he was doing the “wrong” thing by holding on to his shares, and yet he made a very impressive rate of return! When he sold his shares, he made US$225,000! Moral of the story: hang on to your shares and see where it can take you, even when things seem bleak for a while.
The first and foremost rule you should learn and repeat on a daily basis is, “Make no emotional trades. Trade only with logic and reason.” Many people, when deciding when to sell or buy, often rely on the emotions of the media and the market. They sell when they should be buying and buy when they should be selling.
If stock prices go up, they think that it will continue to go up, so they buy at the peak of price curve. When prices start heading back down, they panic and begin to sell for fear of losing more money. They become emotional and irrational, based on what the share prices are doing. Do not let yourself get caught up in this mindset. Put your emotions aside when you are considering trades.
Before you buy stocks from any company, you must first determine how much each share should be worth. You do this by comparing the price of the share with the earnings ratio of the company. If the share price of a particular company is at US$1.00, but the earnings projection of the company is expected to grow 10 times within a certain period, then the share price would be worth US$10.00. So if that stock is priced at US$15.00 per share, then it is overvalued, and you most likely should wait until it goes down somewhat.
On the other hand, if you bought shares at US$5.00 per share and it is now up to US$14.50 per share, you could sell and earn US$9.50 per share. Imagine if you had 1,000 shares in the company, you would make over US$9,000! Not a bad rate of return.
This is fancy term that simply means, “Don’t put all your eggs in one basket.” In practicality, investing in different types of markets is a wise choice. Invest in bonds, mutual funds (a managed group of people investing in a variety of investments, complete with a mutual fund manager), real estate and both income producing stocks and growth stocks. Each of these types of investments can help you make money no matter what the market is doing, and will help to minimize loss when the market has taken a nose-dive. You can make money if you know what you are doing, or you take the time to learn before advancing. Above all, have fun with it!
Hopefully this guide to online trading in india has been useful to you!