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How to start trading in equities
In life, you can't make decisions based on fear and the possibility of what might happen. Things are no different in the trading world. The act of buying and selling a financial in equites can be a challenging game for newbies or anyone who doesn't adhere to a well-thought-out strategy, know-how of financial markets etc.
Online trading has simplified the complex of trading to an extent that millions of people have started enrolling every year. However, a lot of those people ended up quitting after facing losses. Why? They didn’t master the basic skills to make right judgement calls. However, if you spend adequate time learning, it’s possible to book good profits right from the beginning.
Once you get your head on straight, you can embark on learning trading and start with these basic steps.
1. Open trade account & Demat account
A trading account is used to buy or sell equity shares in a stock market. Previously, the traders used to manually trade using hand signals and verbal communication to convey their buying/selling decisions. However, soon after the boom electronic trading by stock markets, online trading opened up to masses. Now, you can open a trading account, with a registered stock market broker, who conducts trading on their behalf. Each account has a Unique ID which is used to perform transactions.
Before you open both the accounts, it is essential to check the credibility and the credentials of the broking firm. Moreover, the trading account should allow you to make online investments in mutual funds, equity shares, IPOs, and also in Futures and Options. Lastly, it should have secure interface and protocols such that all your transactions are safe and secure all the time.
The demat account is used as a bank where shares bought are deposited in, and where shares sold are taken from. Example: You have Rs.1000 in your pocket, you go to a cafe and tell the waiter that you want a cup of coffee, you check the price, and finalize the transaction. Then, you take the money out of your pocket, and give it to the waiter. In this case, the pocket acts as the demat account, while you act as the trading account.
2. Educate yourself
Start to follow the market every day in your spare time. Get up early and read about overnight price action on foreign markets. It is important that you know trading terms like buy, sell, IPO, portfolio, quotes, spread, volume, yield, index, sector, volatility, etc. before you place your first order in the stock market. Read financial websites or join investment courses to gain a better understanding of the stock market jargon and related news.
There are always ups and downs in the stock market. Beginners often do more damage to their share trading account by expecting higher returns with high risks. As risk is unavoidable in online share trading, low-risk high-reward trading methods ensure that rewards are gained while risks are controlled.
As the old adage goes, fail to plan and you plan to fail. Those who are serious about being successful, including traders, need to have a strategy in place for investment and trading in the stock market. It is of utmost importance to make right investment decisions through your trading strategies. Decide the amount you want to invest and the time limit for which you want to hold the investments. Accordingly, you can schedule your orders to buy and sell, depending on the cash limits and exposure set by you as per the planned strategy.
3. Learn to Analyze
Financial analysis is used to make inferences about future share prices and overall health of a company using company reports and non-financial information, such as industry comparisons and estimates of demand for growth of the company’s products. It is important to ask questions such as “What advantage does this firm have over other firms?” or “Does it have a sizeable market share?”
Technical analysis involves the use of a two-dimensional chart to map the historical movement of prices. It uses historical values of share prices and volume charts to make predictions about future prices.
Using both types of analysis will allow you to make sound decisions.
4. Practice trading
Using an online stock simulator is a good idea to practice your skills at zero risk. By playing virtual stock market games, you can increase your knowledge on investing strategies. Most of the online virtual stock market games are synchronized with market indices and stock values, thus giving you a real experience of trading in stocks using virtual money. This helps in understanding the working of the stock market, without having to lose on stocks.
5. Risk Management
Risk management is another specific procedure associated with stock markets. As investing in the equity market involves risk, the comprehensive system of risk management ensures that investors’ interest remains protected while exercising any curbs on frauds from a company’s end.
The system also enables the stock market to remain updated with any changing trading mechanisms and hedge possible market failures.
6. Learn Share market basics
Stock trading isn’t as easy as what you see in the films, however it’s possible to get started from the comfort of your home. But you’d better know what you’re doing before you enter the arena of trading. Here is a list of basic terms you’ll come across along the way:
Types of trading:
- Intraday trading: In intraday trading or day trading, you must square off all positions before the market closes. For intraday trading, you may avail the use of margins, which is the funding provided by the broker to increase your exposure in the stock market. It allows you to purchase/sell an additional number of stocks, which would otherwise require you to invest greater amount of funds.
- Delivery trading: It involves buying the stocks and holding them for more than one day, thus taking their delivery. It does not involve the use of margins, and hence you must possess the funds for your share market investments. It is a more secure method of investing in the Indian share market.
- Bull market
A bull market is a market condition where there is a general trend of growth throughout the market. This is characterised by a widespread optimism among the investors and a general confidence that the prices will keep rising.
A substantial rise in the stock prices is seen during the bull market. A substantial decline in the stock prices (typically 20%) is also observed before and after this period.
- Bear market
A bear market is a market condition where there is a general trend of decline throughout the market. This is characterised by a widespread pessimism and increased selling activity where the investors anticipate a decline in stock prices.
A substantial fall in the stock prices is seen during the bull market. Typically, if a decline of about 20% from the peak is observed over a span of several months, it is said that the market has entered the bear period.
- Long and short positions
An investor is said to have long positions if he/she has bought the shares and owns them. On the other hand, if an investor owns these stocks to some other entity but does not own them, he/she is said to have short positions.
For example, if an investor has bought 500 shares of Company X, then he/she is said to be 500 shares long. This takes into consideration that the investor has paid the full amount for these shares. However, if the investor shares 500 shares of Company X without actually owning them, he/she is said to be 500 shares short. This often happens when an investor borrows shares into his margin account from the brokerage firm in order to make the delivery. This investor now owes 500 shares and must purchase these shares in the market to make a delivery at settlement
7. Know your rights
Before entering into a contract with a broker, ensure that it is registered with SEBI and that its credentials support its claims. Ensure that you receive a ‘Statement of Accounts’ for funds and securities settled every quarter and documented proofs of all deposits that you make.
Now that you have a basic understanding of trading in equities and demat, it only makes sense to move on to the next chapter.
- Open a trading account, with a registered stock market broker, who conducts trading on their behalf. Each account has a Unique ID which is used to perform transactions.
- The demat account is used as a bank where shares bought are deposited in, and where shares sold are taken from.
- Educate yourself about the market and its ups and downs every single day. Get up early and read about overnight price action on foreign markets and you should know trading terms like buy, sell, IPO, portfolio, quotes, spread, volume, yield, index, sector, volatility, etc. before you place your first order in the stock market.
- Always do a financial analysis and technical analysis when you need to so you can make sound decisions.