To start with, it is pertinent first to study the difference between investing and trading. Stock trading refers to purchasing or selling stocks to earn profits with short term fluctuations in the prices of stocks while investing is mainly for the long term. There are certain things to be remembered before beginning to trade and are covered in this article.
Before you start trading, it is mandatory to have a trading account. The following should be the ideal steps for how to open trading account:
- Step 1 - find a stockbroker related to any of the two depository participants, CDSL (Central Depositories Services India Ltd.) and NSDL (National Securities Depository Ltd.). These will provide you with a DEMAT account and a trading account, where you would be allowed to buy and sell stocks.
- Step 2 - To open a trading and DEMAT account, you will need documents like PAN card, Aadhar Card (linked together with your phone number), email ID and bank account details of the account you would like to associate your trading account with.
- Step 3 - With these two preliminary steps and after adding funds to your account, you will be good to start trading online.
One must decide the trade frequency, depending on how much time they can allot to trading and their interests. Even lifestyle depends on the way of trading. Professional traders lock profits consistently; from outside it might look like a labour intensive job where a trader has to sit in front of the screen for hours. However, some professionals would book their profits in a few hours and have a flexible lifestyle which would trump over 9-5 jobs.
While there are no best ways to stock trade for beginners, there are different risks and rewards associated with each mode you choose. Some of the common approaches include:
Intraday Trading: Day traders buy and sell stocks throughout the day to square off the securities before the market closes. Intraday trading has the potential to get quick returns.
Swing trading: This is often a longer-term approach than day trading. Swing trading takes trades that last from each day to many weeks. It offers relatively quick rewards and fewer potential losses than day trading; however, it is a labour-intensive approach.
Must know terms for traders
Stock: A stock is the fractional ownership of a listed company.
Stock Price: The term is not to be confused with the company’s net worth/ value. Stocks do not have a specific price. They continually fluctuate with the change in LTP (last traded price).
Exchange: Exchanges such as NSE and BSE are the platforms where the stocks are traded. These exchanges have set hours. NSE and BSE allow trading from 9:15 a.m. to 3:30 p.m. from Monday to Friday. Trading outside of these hours is called pre-market and after-hours trading.
Market Depth: This shows the demand and supply of that stock. The ‘bid price’ represents the maximum price that a buyer is willing to pay for a share of stock or other security. The ‘ask price’ represents the minimum price that a seller is ready to take for that same security. If the numbers are high, the stock has a significant trade volume and high liquidity.
Market Order: When you are willing to purchase/sell at whatever price the market is offering.
Limit Order: In a Limit order, you specify a price beyond which you are not willing to go for buying/selling of a stock. For, e.g. If you want to buy 100 shares of ITC and you have INR 20,000. You will put a limit order to buy 100 shares of ITC at or below 200 price.
Things to know Before you start trading in share market
According to data released by SEBI, the new Demat accounts activated rose to an all-time high of 10.7 million between April 2020 and January 2021. Thus many enter this arena annually, but most of them also walk out after a while. To survive and stay in, one needs adequate time to figure out the essential skills to tilt the chances in their favour. Few recommended things one should do before entering the market are:
1. Start to follow the market every day in your spare time. Explore news sites like Mint, ET market, MoneyControl, etc. These are excellent resources for brand spanking new investors.
2. Study the technical analysis and price charts in time frames as per your sort of trading. For instance, swing traders can use weekly, daily and hourly charts. You might think fundamental analysis offers a better path to profits because it might show a company’s growth curves and revenue, but traders keep practising price action that gives different buying and selling signals from underlying fundamentals. However, do read annual and quarterly reports because they provide a trading edge over those who ignore them.
3. To practice what you’ve learned, one can begin with paper trading or virtual trading, which offers an ideal solution allowing beginners to follow real-time market actions, making buying and selling decisions that form a theoretical performance record outline. It always involves employing a stock exchange simulator to design and feel an actual stock exchange’s performance. Make many trades using different holding periods and methods, then analyze the results for mistakes and note them down so that you’ll try your best not to repeat them. Within the market, failure is the best teacher.
5. Remember that making profit on a virtual platform won’t be the same for real money profits as psychology will play a significant role when real money is at stake; it is a valuable tool for learning how trading works and what style fits you. To earn profits in the market, one should first invest in learning courses that are available to them. There are plenty of good resources for trading such as Zerodha's Varsity, 5paisa Academy, Kotak securities material and Trading in zone (by M Douglas).
It's important to note that starting to trade is easy, however be prepared for making mistakes and booking losses and take calculated risks, i.e. not more than you can afford to lose. Don’t get emotionally attached to any stock and use the stop loss.
Start your trading journey with a profound knowledge of the markets, read charts and backtest and build strategies based on your observations. Test these strategies with paper trading and analyze the profit/loss and keep making adjustments. Then complete the first step of your journey as a trader with a monetary risk that forces you to deal with trade management and market psychology issues. One tends to make mistakes, but keep in mind to constantly learn from them. Over time, you’ll know what works for you.