How To Trade In Stock Market

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  • 09 Feb 2023

Other than a bank account, you will need to get trading and demat accounts opened with a 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 dematerialized 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.

Choose The Right Broker

While the broker who is perfect for you would vary with your trading needs, here are a few key points to look for when selecting a broker:

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

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

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

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

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

  7. Check the customer ratings.

Educate Yourself

Read to be sure that you are familiar 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 the pink papers 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 on 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 would help you along. 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 MOOCs offered by established universities. Choose a course that starts at your current level of understanding and keep getting better with time.

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. Majority of the trades 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 would 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 less risky way to trade.

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. Characterized 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.

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 trading day when delivery is taken by investors.

Before The Digitization

Indian stock market is among the longest running markets in Asia. Bombay Stock Exchange (BSE) was Asia’s first stock exchange. Before the dematerialization 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 dominate the market.

Further, the information imbalance and an apparent conflict of interest incentivized 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 was 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 the price discovery more transparent. The price information was no more a secret available only to a handful of traders present at the exchange but was widely broadcasted to everyone.

In an auction market, the price at which a trade is made 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.

You should only invest 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 that 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.

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 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.

Know Your Rights

Before you invest in the share market, make sure that you are aware of your rights as an investor. For example, a shareholder is entitled to receive copies of the annual report from the company. You would also be able to vote in general meetings and receive dividends once approved. Check the SEBI website to make yourself familiar with all your rights and how to trade in share market.

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