All You Need To Know About Online Stock Trading

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  • 03 Feb 2023

Stock market investment can be rewarding. But it can be costly too, especially if you are a beginner. Investing in stocks requires strategy, knowledge, and patience. Mastering these skills ensures a smooth journey to long-term wealth creation.

You can start stock trading easily with the help of your internet-connected smartphone or computer via an online trading platform. Other than that, here’s what you will need—a savings account, a demat account, and a trading account. You will also need to find a broker. A broker is an intermediary who facilitates a link between the trader and the stock exchange.

Indian stock exchanges allow you to invest in various kinds of trading instruments. These range from equities and initial public offerings (IPOs) to derivatives and many other asset classes. Different stock exchanges let you trade different financial instruments.

For example, let’s consider the two major stock exchanges of the country—the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Both the NSE and the BSE deal in not only stocks but also securities like bonds, debentures, commodities, currencies, and more.

You can become a stock investor by following a few key principles. These include strategies derived from expert investors and knowledge gained from extensive research. The secret to becoming successful in trading lies in understanding when to apply what strategy.

But before you begin stock trading:

1. Decide your goals

Before investing, you must determine the purpose and duration of your investment. Try figuring out your answers to a few critical questions:

  • By when will you need your cash back—in six months, a year, five years, or longer?
  • What are you saving for—retirement, your child’s education, purchase of a home, or home renovation?
  • Does the online stock market fit your investment needs?

If your investment horizon is short—say, just a few years—consider a fixed-income investment. This can be a safeguard against stock market volatility in the short term, for there is no guarantee that all of your capital will be available in case you need it.

Your goal and time horizon will decide how much capital you will need and what kind of return would be best. In this case, you could use an online financial calculator to estimate how much capital you are likely to need in future.

To put it simply, the growth of your portfolio depends on three factors:

  • The amount you have invested
  • The return on your capital
  • The period of your investment

Ideally, it’s important to hold stocks for a long duration. This allows companies time to grow and increase the potential for stocks to provide positive returns through capital appreciation. The rule of thumb is to start saving as soon as possible and invest for the long term. This can help improve returns and keep your risk appetite healthy.

2. Understand Your Risk Appetite

A person’s risk capacity can be influenced by his education, income, and wealth. As these increase, risk tolerance generally increases. However, as one gets older, one’s risk tolerance tends to decrease.

Simply put, your risk tolerance is how you feel about the risk involved when you bet your money. Each person has a different risk appetite. For instance, you might be someone who would risk Rs 500 to win Rs 5,000. Or you may bet Rs 5,000 to win Rs 5,000. Your risk tolerance can be a factor in choosing the stock trade that you make.

The idea of perception is particularly important in investing. The risk-taking capacity of a person can change according to their perception of the risk. As you gain knowledge about how stocks are bought and sold, and about the volatility of the market, it becomes easier for you to make better-informed decisions.

Stress and anxiety could be a deal-breaker here. Assessing your risk tolerance can help you figure out the right trade for you. Any asset that triggers emotional responses as opposed to logical responses is probably a bad choice for you.

3. Build A Trading Strategy

Trading strategies differ for both traders and investors. For traders, the challenge is to seek profits from market movements. In contrast, for investors, the objective is to earn profits from the long-term price movements of the assets held. While a trader may perform tens and hundreds of trades in a week, an investor focuses on buying and holding an asset for anywhere from a few months to several years.

If you are an investor, learn to understand the fundamentals of the companies. You can check our University section on Fundamental Analysis for this. Alternatively, if you want to start stock trading, you can Learn Technical Analysis first.

4. Control Your Emotions

Having control over your emotions is the key to profitable stock trading. In the short term, the stock price of a company reflects the emotions of the entire investment community. When investors become worried about the company, its stock price sees a decrease. Similarly, when investors feel positive, the stock price increases.

During a trading day, the prices of securities move up and down. These short-term price movements are the results of rumours, hopes, and speculations. To read them correctly, you would need to carry out technical analysis of the company’s assets and management.

While investing in stocks, you would also need to determine a few things to make your trading strategy work. For example, when you buy a new stock, estimate the highest and the lowest price of the stock. Then, specify the price at which you will liquidate your holdings. This technique is known as a stop-loss order. It represents an exit strategy that can safeguard your portfolio against loss.

5. Learn The Basics

For a new investor, it is important to gain knowledge about the fundamentals of the stock market. As the stock market follows the laws of supply and demand, keep an eye on financial news, websites, and newspapers. It will help you to become an efficient investor.

Here are a few things you need to do to get better at trading:

  • Familiarise yourself with terms related to the stock market. This includes understanding terms such as ‘price-to-earnings ratio’, ‘earnings per share’, ‘return on equity’, and ‘compound annual growth rate’. Here is a helpful list you can refer to.
  • Research and discover effective stock-picking methods. Learn about fundamental and technical analysis, know how they are conducted, and see which aligns best with your strategy.
  • Understand the various types of stock market orders—limit order, stop market order, stop-limit order, trailing stop-loss order, etc. Try to diversify across stocks. This can help you across different market conditions. Sometimes when some stocks fall, some companies’ stock prices go up. This can help safeguard your portfolio.

6. Research And Select Your Stocks

As soon as your trading account is opened, you can begin investing. Next, pick your stocks and decide how much you want to invest.

Traders usually pick a stock after conducting a thorough analysis of a company. They look at public information such as earnings reports, annual reports, and other research reports from professional analysts. Nowadays most brokers provide this information to their investors.

At first, pick one or two stocks and invest a certain amount of money that you can afford to lose. If everything goes as expected, you can invest the gains back into the stocks, or maybe into some other companies. However, do not invest more funds unless you are sure of your assumptions. Try doing some research on other companies in the meanwhile.

7. Select An Online Broker

To conduct stock trading, you need to open an account with an online stock market trading partner. They would provide you with tools and support to carry out stock trading. If you already know how to select a broker, you can go ahead and compare the options.

Ideally, to find the best demat account for beginners in India, every individual should compare the options based on customer support, educational resources, as well as commissions and maintenance charges Once you start trading more often and get some practice under your belt, you could switch to an affordable broker.

Additionally, do consider the trading software offered by the broker. For new traders, a streamlined, easy-to-navigate platform would be a lot easier to use than one that is designed exclusively for professionals.

8. Be Careful With Leverage

Traders can borrow money and execute stock trading using leverage. In such cases, you only have to pay a small percentage of the trade value. This is called margin trading. For instance, if someone wants to buy 100 shares valued at Rs 100 for a total cost of Rs 10,000, you can place the order with say 10% or Rs 1,000. Many traders use this option to improve the returns they earn. However, this can also mean a higher-than-normal loss if the stock price does not move in the way you want.

Leverage is a tool popular among stock traders. The best time to use it would be after you gain experience and have confidence in your decisions. Reconsider your risk when starting out. You can slowly increase the risk you take with time. This can keep you safe in the long run.

9. Diversify Your Investments

Experienced investors like Warren Buffett have stressed that stock diversification is essential to identify and lower ‘concentration’ risk. This is the simplest way to insure your portfolio from any potential loss.

Spreading your assets across various categories is known as diversification. To manage the risk of your portfolio efficiently, you can own stocks of different companies in different industries, and consider other investment options. This way, you can safeguard your holdings during different market conditions.

The Bottom-line

You don’t need a lot of money to do online stock trading; knowledge is what counts the most. Your online stock market journey will become much easier once you know the fundamentals. Also, it may help to open an account with a reliable broker like Kotak Securities that offers a smooth investment experience and has a dedicated knowledge bank.

The best way to create wealth is by starting to save early. Then invest money in a diversified portfolio that matches your risk profile. If you are willing to trade in stocks, just ensure that you do the homework.

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