How to trade in the stock market: A guide for beginners

 

How to trade in the stock market: A guide for beginners

The stock market is a highway that leads you to opportunities for wealth creation. The share market has the potential to give you enormous profits. On the other hand, volatility is a critical part of the share market. As an investor or trader, you may see profits and losses, ups and downs. So, it is important to learn how to trade in share market as beginners.

What is stock trading?

Trading typically means buying and selling shares in the secondary market on the same day. So, it is necessary to get an understanding of the primary and secondary markets.

·         Primary market: A primary market is where companies issue new securities and offer them to the public. So, the transaction happens between issuers and buyers.

·         Secondary market:In the secondary market, you can buy and sell shares that are issued in the primary market. The transaction takes place between seller and buyer. The stock exchange or broker acts as an intermediary in the secondary market.

Read more:How the share market works in India

Now, if you buy and sell a share on the same day, the transaction is called intraday trading. At the end of the day, the trader books either a profit or loss.

Process of stock trading for beginners

The following tips will help you begin your journey in stock trading:

1) Open a demat account:

To enter the share market as a trader or investor, you must open a demat account or brokerage account. Without a demat account you cannot trade in the stock market. The demat account works like a bank account where you hold money to use for trading. The securities you buy are maintained electronically in the demat account.

2) Understand stock quotes:

The price of a stock moves on the basis of any news, fundamentals, technical analysis, and so on. By gaining knowledge about these aspects, you can enhance your knowledge of stocks and stock markets. This will help you to figure out the right price to enter or exit a trade.

3) Bids and asks:

A bid price indicates the maximum price you are willing to pay to buy a stock. The ask price is just the opposite. It represents the minimum price at which the seller is willing to sell the stock. To ensure a profitable trade, it is important to decide on the correct bid and ask price.

Read more: Share market timings

4) Fundamental and technical knowledge of stock:

Study the fundamental and technical analyses of the stock to plan your trading. Fundamental analysis evaluates a security by measuring its intrinsic value. It considers various dynamics including earnings, expenses, assets, and liabilities. Meanwhile, technical analysis evaluates the stock based on the past price and volume chart of the stock to predict future potential.

5) Learn to stop the loss:

Volatility is an implicit characteristic of the share market. So, it is important for a beginner to understand the way of preventing heavy loss. While executing a trade, you need to set a stop loss price to minimise the loss. Failure to put a stop loss may damage your capital heavily.

6) Ask an expert:

The share market is unpredictable. Nobody can predict a stock price accurately. But taking advice from an expert helps beginners make the right trading decision. It guides you to make the right choice.

Read more: Day trading options

7) Start with safer stocks:

A big capital loss in the beginning may bring your confidence down. A wise choice is to start with the less volatile stocks. That may give you a slow start. But those stocks are more likely to sustain a good performance even in adverse conditions.

Share market investments can be tricky. You can take the first step to trading success by opening a demat account. Next, work on developing adequate knowledge of the stock market. This will help you to work against the odds and beat stock market volatility.

 

 

Imagine this: A man's company is knee-deep in debt from banks and creditors. But when he opens up his company to the common man, other people invest in the company and become part owners in the process. These owners together invest money, and work towards making the company debt-free and profitable.

How do so many people own a single company? If one man started the company, what role do these people have? Why would someone prefer taking money from people and making them part owners instead of just borrowing from banks? And how good is this option for the common man as an investment? What are the things he should take care of before investing in a company? These are some of the questions, the answers to which will help you understand share trading in India. 
 

Share trading in India - Joint Stock Company

Once the venture capital funding is exhausted and the company has attained a certain size, its next objective could be to become India's biggest company. This is when the company goes out to the public to raise money. People can buy part ownership of the company for as little as 10 rupees. Therefore, if the company has Rs 5 crore invested in it and you have invested 10 rupees in it, you own the proportionate share in the company - (2e-7) %.
Whenever the company earns a profit, every owner is entitled to dividend.
 

Share trading in India - Equity shares

The certificates issued to the public who invest in a company are called equity shares. These are issued when the company gets publicly listed and people start stock market trading in its equity shares. The public listing of a company means its shares get available in a marketplace for equity shares. The NSE and BSE are the two biggest marketplaces for equity shares.

Share trading in India - Primary and Secondary Market

The stock market is divided into two kinds of market. The primary market is where the shares of any company getting newly listed are bought directly from the company through the stock market.
The other, much bigger and sometimes more profitable, market is the secondary market where the shares bought off the primary market may be traded further. For example: All shares of a company have been sold and you want to trade in those shares. You can bid for the shares from the new owners by quoting a higher amount: Rs. 20 for the Rs.10 share. Any new owner of the shares may take up the offer and exit the investment.  
 

Tips for share trading in India

Do's for share trading in India:

Always deal with the market intermediaries registered with SEBI / stock exchanges.

Ensure that the documents or forms for registration as Client, are fully filled in.

Give clear and unambiguous instructions to your broker /agent / depository participant.

Always insist on contract notes from your broker. In case of doubt in respect of the transactions, verify its genuineness on the Base website.

Always settle dues through the normal banking channels with market intermediaries

Before placing an order with the market intermediaries, please check about the credentials of the companies, its management, fundamentals and recent announcements made by them and various other disclosures made under various regulations. The sources of information are the websites of Exchanges and companies, databases of data vendor, business magazines etc.

Adopt trading/ investment strategies commensurate with your risk-bearing capacity as all investments carry some risk, the degree of which varies according to the investment strategy adopted.

Carefully read and understand the contents stated in the Risk Disclosure Document.

Be cautious about stocks that show a sudden spurt in price or trading activity, especially low-priced stocks.

There are no guaranteed returns on investment in the stock market

Send important documents by a reliable mode (preferably through registered post) to ensure delivery.

Ensure that you are holding securities before you sell.

Keep track of your posts – both the ones you send or are yet to receive.

Mention clearly whether you want to transact in physical mode or in Demat mode.

Lodge your Arbitration Application against the Trading Member, at the concerned Regional Investor Service Centre, by confirming geographical jurisdiction. Please use for the purpose, your address as intimated to your Trading Member by following due process of law. The details of geographical jurisdiction of each Regional Investor Service Centre are also available on the Contract Note. The period consumed in redressal of complaint thru IGRC services will not be considered while measuring period of ‘limitation’ in filing arbitration application provided the complaint and / or arbitration application is / are filed at the concerned Regional Investor Service Centre.

Lodge your complaint against a company listed on BSE, at the concerned Regional Investor Service Centre, by confirming geographical jurisdiction. Please use your address for deciding the geographical jurisdiction. This will enable to process the complaint expeditiously.

Don’ts for share trading in India:

Don't deal with unregistered brokers / sub - brokers, or other unregistered intermediaries

Don't execute any documents with any intermediary, without fully understanding its terms and conditions

The Exchange redresses investors’ complaints through arbitration and IGRC mechanism, which are quasi-judicial in nature. The period consumed in redressal of complaint thru IGRC will not be considered while measuring period of ‘limitation’ in filing arbitration application provided the complaint is filed at the concerned Regional Investor Service Centre.

Don't deal based on rumours or 'tips' or believe in guaranteed returns

Don't get misled by companies showing approvals /registrations from Government agencies as the approvals could be for other purposes and not for the securities you are buying

Don't blindly follow media reports on corporate developments

Don't imitate investment decisions of others

Don't forgo obtaining all documents of transactions, even from people you know

Don't get misled by guarantees of repayment of your investment through post-dated cheques

 

Share Market Investment Guide for Beginners

A share market is a place where shares are publicly issued and traded. A share serves as a tradeable document that validates your ownership of a company. The share market is also where buyers and sellers exchange these documents. To facilitate the exchange publicly, a formal marketplace has been developed for investors to buy and sell their shares.

Share Market Investment for Beginners

To invest in stocks publicly listed on the market, you need to fulfil the following requirements:

1. Personal documents

• PAN Card
• Aadhaar Card
• Name on a cancelled cheque from your active bank account
• Proof of residence based on a list of documents that have been accepted by your stock broker, depository participant, or bank
• Account statements
• Passport-size photographs

2. Demat Account

A Demat account serves as an electronic house for your shares. Opening a Demat account is a hassle-free process conducted online or offline with the help of a depository participant. Many banks also offer Demat account services to their investors.

3. Trading Account

A Demat account and trading account go hand in hand. A trading account is used to buy and sell securities that you wish to trade on the stock market. Both Demat and trading account are mandatory for investing in the share market.

The Bombay Stock Exchange and the National Stock Exchange are primary exchanges where stocks are listed. However, some stocks may only be available on either one of these two exchanges. Hence, it is advisable to open your trading account with a depository participant who offers trading on both BSE and NSE.

4. Linked Bank Account

Linking a bank account to your trading account ensures a seamless flow of money in and out of your account as you trade. This is mandated by most brokers with whom you will choose to open a Demat and trading account.

Currently, you can find two-in-one accounts that serve as both a Demat account and a trading account. Some brokers also offer a three-in-one account where one can trade directly from their bank account and store their securities in the same location.

The Investment Process

The investment process differs when choosing to invest in the primary share market as compared to the secondary share market.

1.Investing In The Primary Share Market

A primary share market investment is made through an initial public offering (IPO). Once all applications for the IPO are received and counted by the company in consideration, the shares are allotted to investors based on demand and availability.

IPO application is made simple through your net banking account via Application Supported by Blocked Amount (ASBA). As an example of this process, if you have applied for shares that are worth ₹1 lakh, this amount will be blocked into your bank account instead of being sent directly to the company.

Once your shares are allotted, the exact amount is then debited with the balance being released. All IPO applications have to compulsorily follow this procedure. Once shares are allotted, they are listed on the stock exchange, and you can begin trading them within one week.

2.Investing In The Secondary Share Market

The secondary share market is where stock buying and selling action occurs between investors. Follow these steps to invest in the secondary share market:

• Open a Demat and trading account using your linked banking account.
• Log into that trading account.
• Select the shares that you wish to buy or sell.
• Ensure that you have the requisite amount of funds in your account to buy the shares.
• Next, decide the price at which you want to buy or sell a particular share.
• Wait for the buyer or seller to reciprocate that request.
• Complete your stock market transaction by paying for and receiving the shares or transferring the shares and receiving the money.

Final Words

The process of investing in stocks for beginners is quite simple. It’s crucial to be aware of your investment horizon and financial goals before you start investing in the stock market. Having advanced tools, expert recommendations and detailed real-time stock analysis data at your disposal as a beginner in the stock market is a huge factor towards risk minimisation. To avail of these benefits and more, open a Demat and trading account with IIFL today.

How Stock Trading Works

Stock trading is a form of investing that prioritizes short-term profits over long-term gains. It can be risky to dive in without the proper knowledge.

 

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The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

Stock trading involves buying and selling shares in companies in an effort to make money on daily changes in price. This short-term approach is what sets stock traders apart from traditional stock market investors who tend to be in it for the long haul.

While trading individual stocks can bring quick gains for those who time the market correctly, it also carries the danger of substantial losses. A single company's fortunes can rise more quickly than the market at large, but they can just as easily fall.

“Trading isn’t for the faint of heart," says Nathaniel Moore, a certified financial planner and a certified kingdom advisor at AGAPE Planning Partners in Fresno, California. "Don’t take the risk and invest money if you need it."

If you do have the money and want to learn trading, online brokerages have made it possible to trade stocks quickly from your computer or smartphone.

But before you dive in, you should make sure you know how the stock market works, the best apps for trading stocks, and how to manage your risk.

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What is stock trading?

There are two main types of stock trading:

Active trading is what an investor who places 10 or more trades per month does. Typically, they use a strategy that relies heavily on timing the market, trying to take advantage of short-term events (at the company level or based on market fluctuations) to turn a profit in the coming weeks or months.

Day trading is the strategy employed by investors who play hot potato with stocks — buying, selling and closing their positions of the same stock in a single trading day, caring little about the inner workings of the underlying businesses. (Position refers to the amount of a particular stock or fund you own.) The aim of the day trader is to make a few bucks in the next few minutes, hours or days based on daily price fluctuations.

» Read more: How to day trade

How to trade stocks

If you're trying your hand at stock trading for the first time, know that most investors are best served by keeping things simple and investing in a diversified mix of low-cost index funds to achieve — and this is key — long-term outperformance.

That said, the logistics of trading stocks comes down to six steps:

1. Open a brokerage account

Stock trading requires funding a brokerage account — a specific type of account designed to hold investments. If you don't already have an account, you can open one with an online broker in a few minutes. But don’t worry, opening an account doesn’t mean you’re investing your money quite yet. It just gives you the option to do so once you’re ready.

2. Set a stock trading budget

Even if you find a talent for trading stocks, allocating more than 10% of your portfolio to an individual stock can expose your savings to too much volatility.

"If all of your money’s in one stock, you could potentially lose 50% of it overnight," Moore says.

If you want to invest, he says, you could start by saving $200 a month. When you get to $1,000, you could invest $500 of that. Consider the $500 you're not investing like a parachute. You might not need it, but it's there if you do. Other do's and don’ts include:

·         Invest only the amount of money you can afford to lose.

·         Don’t use money that’s earmarked for near-term, must-pay expenses such as a down payment or tuition.

·         Ratchet down that 10% if you don’t yet have a healthy emergency fund and 10% to 15% of your income funneled into a retirement savings account.

3. Learn to use market orders and limit orders

Once you have your brokerage account and budget in place, you can use your online broker's website or trading platform to place your stock trades. You'll be presented with several options for order types, which dictate how your trade goes through. We go through these in detail in our guide for how to buy stocks, but these are the two most common types:

·         Market order: Buys or sells the stock ASAP at the best available price.

·         Limit order: Buys or sells the stock only at or better than a specific price you set. For a buy order, the limit price will be the most you're willing to pay and the order will go through only if the stock's price falls to or below that amount.

4. Practice with a paper trading account

"Try investing in the market without putting money in the market yet to just see how it works," says Moore.

You can do that by investing your time, he says, pick a stock and monitor it for three to six months to see how it performs. You can also learn the market via the paper trading tools offered by many online stock brokers. Virtual trading with stock market simulators lets customers test their trading acumen and build up a track record before putting real dollars on the line.

Several of the brokers we review offer virtual trading, including TD Ameritrade and Interactive Brokers.

» Learn more: Read our explainer on paper trading with stock simulators

5. Measure your returns against an appropriate benchmark

This is essential advice for all types of investors — not just active ones. The bottom-line goal for picking stocks is to be ahead of a benchmark index. That could be the Standard & Poor’s 500 index (often used as a proxy for “the market”), the Nasdaq composite index (for those investing primarily in technology stocks) or other smaller indexes that are composed of companies based on size, industry and geography.

Measuring results is key, and if a serious investor is unable to outperform the benchmark (something even pro investors struggle to do), then it makes financial sense to invest in a low-cost index mutual fund or ETF — essentially a basket of stocks whose performance closely aligns with that of one of the benchmark indexes.

» View our list: The best-performing stocks this year

6. Keep your perspective

Being a successful investor doesn’t require finding the next great breakout stock before everyone else. By the time you hear that a certain stock is poised for a pop, so have thousands of professional traders, and the potential likely has already been priced into the stock. It may be too late to make a quick turnaround profit, but that doesn’t mean you’re too late to the party. Truly great investments continue to deliver shareholder value for years, which is a good argument for treating active investing as a hobby and not a get-rich-quick scheme.

How to manage stock trading risks

Wherever you fall on the investor-trader spectrum, these four tips for how to trade stocks can help ensure you do it safely.

1. Lower risk by building positions gradually

There’s no need to cannonball into the deep end with any position. Taking your time to buy (via dollar-cost averaging or buying in thirds) helps reduce investor exposure to price volatility. Moore says you can also look into high-dividend stocks, which pay out a portion of earnings to investors, and ETFs, which allow you to spread your risk out among multiple companies.

» Learn more: See our list of high-dividend stocks and how to invest

2. Ignore 'hot tips'

People posting in online stock-picking forums and paying for sponsored ads touting sure-thing stocks are not your friends. In many cases, they are part of a pump-and-dump racket where shady people purchase buckets of shares in a little-known, thinly traded company (often a penny stock) and hit the internet to hype it up.

As unwitting investors load up on shares and drive the price up, the crooks take their profits, dump their shares and send the stock careening back to earth. Don’t help them line their pockets.

» Learn more about the various types of stocks

3. Keep good records for the IRS

If you’re not using an account that enjoys tax-favored status — such as a 401(k) or other workplace accounts, or a Roth or traditional IRA — taxes on investment gains and losses can get complicated.

The IRS applies different rules and tax rates and requires the filing of different forms for different types of traders. Another benefit of keeping good records is that loser investments can be used to offset the taxes paid on income through a neat strategy called tax-loss harvesting.

Where to trade stocks

To trade stocks you need a broker, but don’t just fall for any broker. Pick one with the terms and tools that best align with your investing style and experience. A higher priority for active traders will be low commissions and fast order execution for time-sensitive trades. See our picks for the best day trading apps to learn more.

Investors who are new to trading should look for a broker who can teach them the tools of the trade via educational articles, online tutorials and in-person seminars (see NerdWallet's roundups for the best brokers for beginners). Other features to consider with stock trading apps are the quality and availability of screening and stock analysis tools, on-the-go alerts, easy order entry and customer service.

No matter what, the time spent in learning the fundamentals of how to research stocks and experiencing the ups and downs of stock trading — even if there are more of the latter — is time well spent, as long as you’re enjoying the ride and not putting any money you can’t afford to lose on the line.

 

How to open a demat account

 

To start trading in share market or stock market in India, you need a Demat and trading account. Demat and trading accounts in India are provided by the two depositories, NSDL and CDSL, through brokerage firms, also known as stock brokers or share brokers.
The trading account is where you will place bids for buy or sell orders and demat account is for holding your shares in dematerialized form. The trading of shares in Indian stock market takes place on two stock exchanges - the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Steps to open a share trading account

1. Find a broker

The first step is to find a stock broker or firm. Stock brokers are of two types - full service and discount. A full-service broker provides a variety of services along with buying and selling of shares such as research and advice as well as retirement and tax planning.
For example, if you open your trading account with a bank subsidiary, it can be your a 3-in-1 account, i.e., a savings bank account, a demat account and an online trading facility. Other full-service brokers provide all these facilities except a savings account.
Discount brokers are new to India. They charge a much lower fee than full-service brokers and provide a no-frill stock broking accounts. They only provide the necessary trading facility at the least possible cost.

2. Compare brokerage rates
Every broker charges commission and certain fees for processing investors order. These charges can vary from broker to broker.
Some give discounts on the basis of the amount of trades conducted. Take all this into account before opening an account. But don't over-emphasise the point. You need to understand the facilities offered.

3. Complete KYC
You can visit the office of broker or ask the broker to send its representative to your house with the account opening form and the Know Your Client (KYC) form.
You need to fill up these forms and submit it along with identity and address proofs such as Voter ID card, PAN card, birth certificate, passport, ration card etc.
Once your application is verified, you will be given your trading accounts details.