How to Trade in Stock Market?

Trading in the stock market is an exciting way to grow wealth, but it requires knowledge and understanding. The market offers opportunities for both short-term and long-term profits, and whether you are a beginner or a seasoned investor, knowing how to trade efficiently is key.

To trade with confidence, you need to understand how stock exchanges operate, how to open the necessary accounts, and how you invest in the stock market effectively. This guide will walk you through the basics of stock market trading and help you begin your investment journey.

Process of Trading

To start trading, you need a trading account and a demat account with a registered broker. A trading account is like a bank account meant only to pay for, and receive payments from, trades executed on the stock market. This acts as a gateway between the trading platform or terminal and your bank account. A demat account is a digital locker where all the shares you own are stored in a dematerialised format.

When a trader places an order to buy a stock, the money from the trading account is used to pay for the purchase. After the trade is executed, the digital share is stored in the connected demat account.

Similarly, when a sell order is placed, the trading account checks the connected demat account to ensure that the shares being offered are available. After the trade is executed, the monies are credited to the trading account.

How to Learn Stock Trading

Choose the Right Broker

If you are wondering how to trade in the share market, choosing the right broker is a crucial first step. While the definition of a perfect broker will vary based on your specific trading needs, here are a few key points to consider:

1. Registration: The broker must be registered with all the stock exchanges you want to trade on, and with relevant regulatory bodies like SEBI.

2. Account minimums: Verify the account minimums, including the minimum initial deposit and minimum investment requirement.

3. Commission fees: Ensure that you choose a broker who charges a low commission on the instrument of your choice. For example, if you plan to invest mostly in mutual funds, a low commission on buying individual stocks is not going to benefit you.

4. Account fees: Verify various account fees involved. Most brokers charge a withdrawal fee, some may even charge a fee if you decide to close the account for good. You should check if any of the below fees are charged, and how much they are:

a. Annual fee

b. Inactivity fee

c. Fee for broker-assisted trades like a systematic investment plan

d. Trading platform fee

e. Extra charge for research and data

f. Fee for printing a paper statement

5. Trading style and technology: Match one’s trading style and technology needs with what the broker provides

6. Promotions: Take advantage of any promotions available when looking to open an account, if possible.

7. Customer rating: Check the customer ratings to gauge the broker's reputation and service quality.

• Educate Yourself

Read to familiarise yourself with the market jargon. At the very minimum, you must know what the following terms mean: buy, sell, IPO, portfolio, quotes, spread, volume, yield, index, sector, volatility. Spend time reading pink papers like The Economic Times, Financial Times and financial websites.

• Practice with an Online Stock Simulator

You don’t have to burn your money to learn the basics. Before you invest your hard-earned money, you can invest virtual cash in any of the online stock simulators available. This will give you a hang of how stock markets work and will help you stay calm when you are investing in the real stock market.

• Make an Investment Plan

Identify your investment requirements and an ideal portfolio that would meet those requirements. Then, make an investment plan that would allow you to actually build the portfolio over time. As the old saying goes, failing to plan is planning to fail.

• Find a Mentor

Find someone you trust to be your mentor. He or she will not only answer your questions but will also be able to pinpoint specific areas you need to work on. They may have been through similar situations that you will as a new trader, and therefore their experience can guide you. You can learn from their mistakes instead of repeating them yourself. You will get a chance to learn from their mistakes, rather than from just the ones you make.

• Take Online/In-Person Courses

The Internet is your friend when you are trying to learn something new. You will find not only a lot of online courses offered by various brokers but also Massive Open Online Courses (MOOCs) offered by established universities. Choose a course that starts at your current level of understanding and keep getting better with time.

Tackling Emotions: Developing a Trading Mindset

Stock trading is not just about numbers and charts; emotions play a significant role in decision-making. Fear and greed are the two most common emotions that affect traders. Fear may cause panic selling when the market drops, leading to unnecessary losses.

Greed, on the other hand, might push traders to hold onto their positions too long in the hope of greater profits, resulting in missed opportunities or bigger losses. To tackle these emotions, a disciplined approach is essential. Setting clear goals and sticking to a well-researched strategy can reduce impulsive decisions.

Having a stop-loss order in place will limit your losses and help maintain emotional control. This is especially crucial in volatile markets. It is important to remember that patience is key—successful trading involves waiting for the right opportunity, not chasing every potential gain. Another technique is to track your trades.Reviewing past decisions helps identify patterns, both good and bad, and allows you to learn from them. If you find yourself getting emotionally overwhelmed, consider stepping away from the screen and taking a break. Additionally, joining a trading community or seeking mentorship can provide support and valuable insights.

Sharing experiences and discussing strategies with others can offer different perspectives and help you stay grounded. Also, cultivating emotional resilience is critical for long-term success in stock trading, as it helps you understand the ups and downs of the market with a clear mind, ensuring you remain focused and make informed decisions.

Share Market Basics

• Stock Market and Stock Exchange

A stock market is a market in which a company’s stock, both listed and unlisted, is traded. The Indian stock market, therefore, encompasses not only all the stock exchanges across the nation but also all transactions that take place off-exchange. An organized marketplace where the members meet regularly to trade company stock or other listed securities is called a stock exchange. These members consist of both agents working for a client and traders. The majority of the trade happens in the secondary market, i.e. traders buy and sell shares they own.

• Participating in a Stock Exchange

If individual investors were allowed to interact with the stock exchange directly, the resulting traffic would put their systems under immense pressure and increase the workload significantly. Therefore, all investors and traders are required to work through a broker registered with the stock exchange. The broker would provide login credentials that would allow them to trade on the stock exchange. The trades thus conducted may attract brokerage and tax liabilities. We have already discussed how demat and trading accounts work.

• Intraday Trading vs. Delivery Based

There are two broad ways you can trade in the stock market: intraday trading and delivery-based trading. Intraday trading, as the name suggests, is a trade that must be completed within the day. i.e. you have to sell off the shares you purchase on the same day before the market closes. If you do not sell them yourself, they will be automatically squared off by the broker at the close of the trading day. This allows you to trade on margins alone, and the shares you buy are held by the broker for the day rather than being stored in your demat account.

On the other hand, a delivery-based investment strategy does not require the positions to be squared off within the same day. The shares you buy are credited to your demat account and you will have to pay for them in full. This is typically considered the least risky way to trade.

Bull & Bear Market

The stock market is said to be bullish when a large portion of share prices rise over an extended period. A bull market is marked by optimism, investor confidence and an expectation of continued strong results. It is impossible to predict how the market would react and therefore a bull market is only identified in hindsight. While there is no specific definition of a bull market, it is generally meant to mean 20% rise from the lowest point demarcated by a 20% fall from a peak on both sides.

Bear markets are the opposite of bull markets. Characterised by widespread pessimism and declining investor confidence, the market experiences a sustained downward trend in share markets. A fall of 20% from the peak prices typifies bear markets and can extend for a span of several months.

Long Positions & Short Positions

An investor is said to have a long position when he owns stock. It means that the investor expects that the stock will rise in value over time and a profit can be made by holding the security at the moment and sell later.

On the other hand, a short position generally means that an investor has sold stocks that they don't yet own. An investor does this when they believe that the stock will fall in value, and they can make a profit by buying it at a lower price later. If the price rises instead, the investor in a short position is forced to square off at higher prices and book a loss. An investor can do this as all trades are settled only at the close of the trading day when delivery is taken by investors.

Electronic Trading & Floor Trading

• Before Digitisation

Indian stock market is among the longest- running markets in Asia. Bombay Stock Exchange (BSE) was Asia’s first stock exchange. Before the dematerialisation of shares, traders had to be physically present at the exchanges where the shares they wanted to trade in were listed. This meant if you lived far away from such an exchange, you were bound to face considerable difficulty participating in the market. You were forced to route your orders through a series of correspondent brokers to the appropriate exchange. This meant high transaction costs that kept small traders away from the share markets and a disparity in access allowing a handful of brokers to dominate the market.

Further, the information imbalance and an apparent conflict of interest incentivised market manipulation by the brokers. With the security scan being pulled off by Harshad Mehta coming to light, calls were made for reforms by all market stakeholders. BSE did not respond to these calls and the government of India decided to create a rival stock exchange called the National Stock Exchange (NSE).

• The Advent of Online Trading

The purpose behind establishing NSE was to provide equal access to investors regardless of where they are located and make participating in stock market easier. As the penetration of the Internet was rising in the nation, electronic trading and establishing an online share market were identified as the way forward. NSE was instrumental in establishing National Securities Depository Limited (NSDL), the first depository in India. With this, investors were able to hold and trade securities in a digital form. This not only made investing simple but also made price discovery more transparent. The price information was no longer a secret, available only to a handful of traders present at the exchange but was widely broadcast to everyone.

Auction Market & Dealer Market

In an auction market, the price at which a trade is made is determined by matching a seller and a buyer willing to make a trade. This matching is done after arranging the prices that sellers are willing to accept, and the buyers are willing to pay in increasing order. A trade is made when the lowest of the selling price is equal to the highest of the buying price.

On the other hand, in a dealer market, the dealer is the "market maker". This means the dealer lists the selling and buying price they are willing to support and the investors who are willing to take that price go to the dealer.

How to Create a Robust Investment Plan?

Building a robust investment plan is crucial for achieving financial goals while managing risks effectively. Here’s how you can create one:

• Assess your financial goals
  

Start by defining your short-term and long-term financial objectives. Understand your risk tolerance and determine the time horizon required to achieve these goals. This clarity helps in choosing the right investment options aligned with your priorities.

• Determine your investment capacity
  

Evaluate how much surplus income you can afford to invest without compromising your daily needs or future liabilities. Ensure that you are not putting your essential savings at risk when venturing into stock market investments.

• Diversify your portfolio
  

Spread your investments across various asset classes like equities, debt instruments, and commodities. Diversification reduces the risk of losses by ensuring that different market conditions affect each asset differently, balancing overall portfolio performance.

• Define your asset allocation strategy
  

Based on your financial goals and time horizon, allocate your funds strategically. For long-term goals, focus on equities for higher growth potential. For short-term objectives, opt for safer investments like bonds or fixed deposits to ensure stability.

• Automate investments
  

Setting up Systematic Investment Plans (SIPs) ensures consistent and disciplined investing. SIPs help mitigate the effects of market volatility by enabling rupee cost averaging, making it easier to build wealth over time.

• Regular portfolio review
  

Periodically assess and rebalance your portfolio to stay aligned with your financial goals. Reviewing investments allows you to adjust for changes in market conditions or personal circumstances. By following these steps, you can create a strong, goal-oriented investment plan that helps secure your financial future.

How Much You Should Invest?

You should only invest the surplus that is left over after you have accounted for all your future liabilities and payments. Remember that investments in a share market carry a risk, and therefore you should never endanger your savings when investing. Make sure to use stop-loss to ensure that you cut your losses as early as possible. Further, you should build a diversified portfolio so that market shocks don’t have a devastating impact on your investments.

How to Choose Your First Stock?

When selecting your first stock, focus on companies with strong fundamentals. Look for businesses with a solid model, experienced management, and a proven track record of performance. Evaluate the company’s financial health by analysing key metrics such as revenue growth, profit margins, and debt levels.

Consider its growth potential and unique competitive advantages in the market. Avoid chasing popular or trending stocks without thoroughly understanding the underlying business and industry dynamics. Emotional or impulsive decisions can lead to losses, especially for beginners. Instead, prioritise research and knowledge over hype.

Start with blue-chip companies—large, established firms with a history of stable earnings and reliable dividends. These stocks tend to be less volatile and provide a safer entry point for new investors, allowing you to gain confidence while minimising risks.

Ensure you buy stocks when they are undervalued. Investing in fundamentally strong companies at a discount increases your chances of maximising returns in the long run. Patience and strategic planning are key to successful stock selection.

What Should You Base Your Decisions On?

You should invest in fundamentally strong stocks. Remember that you are not just buying stocks, but a controlling stake in a company that underlies the stock you purchase. Always ask how well is a company placed to grow in the future and how well are they defended against the competition.

Once you have identified companies you want to invest in, make sure you buy their shares when they are trading at a discount. The simple fact is that you make money when you buy low and sell high.

Common Mistakes to Avoid

While trading in the stock market offers significant opportunities, avoiding common mistakes is essential for success. Here are some pitfalls to steer clear of:

• Overtrading
  

Avoid trading too frequently or impulsively. Overtrading often stems from emotional decisions like fear or greed and can lead to unnecessary losses. Stick to your investment plan and maintain discipline.

• Ignoring research
  

Always conduct thorough research before buying a stock. Blindly following tips or market rumours can result in bad investments. Understanding a company's fundamentals and market dynamics is crucial for informed decisions.

• Chasing hot tips
  

Popular stocks often come with high risks. Investing in them without analysis can lead to significant losses. Base your investment decisions on careful analysis rather than market trends or speculative advice.

• Lack of diversification
  

Investing too heavily in a single stock or sector increases risk exposure. A diversified portfolio spreads risk across various assets, reducing the impact of poor performance in any one area.

By recognising and avoiding these mistakes, you can create a more effective and disciplined approach to stock market trading.

Know Your Rights

Before you invest in the share market, it is important to understand your rights as an investor. For example, as a shareholder, you are entitled to receive copies of the annual report from the company. You also have the right to vote in general meetings and receive dividends, if and when approved. To stay informed and updated, visit the SEBI website as it offers detailed guidance on investor rights and provides useful resources on how to trade in the share market.

Conclusion

The stock market presents vast opportunities for wealth creation, but success demands a solid foundation of knowledge, strategic planning, and emotional discipline. By understanding the intricacies of trading accounts, selecting the right broker, and crafting a diversified investment plan, you can understand the market with confidence.

Avoid common mistakes, continuously educate yourself, inculcate a patient, well-researched approach, and remain adaptable to changing market conditions. Remember, every investment journey is unique—staying informed and resilient ensures you capitalise on opportunities while mitigating risks, ultimately making the way for long-term financial growth.