Introduction
The stock market allows people to buy and sell shares of publicly listed companies. This happens through stock exchanges and stock brokers who facilitate these transactions.
While long-term investments do happen in the market, a majority of people enter the market to trade in shares and earn profits from that activity. This blog will try to answer the question of how to start trading in stock market India.
Understanding Stocks
Shares: Shares are small units of a company’s capital, and buying shares of a company is basically buying a small part of the company. Stock is a package of a company’s shares, and owning stock in a company amounts to ownership in the company as well.
Ownership naturally comes with a right to receive share in the profits (in the form of dividends) and voting rights in some cases.
Stock Exchanges: Stock exchanges function as marketplaces where stocks are traded. They offer a platform for people to buy and sell stocks. In India we have the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Opening a Brokerage Account
To buy and sell stocks from an exchange there are brokers who will facilitate the transactions. Traders need to open an account with a brokerage firm. These firms act as intermediaries.
Brokerage firms offer different types of trading accounts. Cash accounts for example, involve paying full in cash for purchases, whereas margin accounts involve the trader borrowing from the broker to trade.
Placing Orders
Order Types:
Market Order: This involves buying or selling shares immediately, and the price shall be the best available current price.
Limit Order: Here, the purchase/sale happens at a specific price or a better price than that. The time of trade depends on the price.
Stop Order: Here too the time of trade depends on the price like limit order, but there is a difference. The price here is specific and the transaction happens as soon as the price reaches the specified level.
Execution: The broker executes the order on the exchange, once it is placed. In case of market orders, the execution is almost instant. The other types are executed when the market conditions meet the specifications of the order.
Stock Market Indices
There are stock market indices that track certain groups of stocks in an attempt to monitor their performance. Examples include, S&P 500, Dow Jones, and Nifty 50. These indices paint a picture of the performance of the stocks that they track. Traders can get an idea of the overall market sentiment based on these indices.
Factors Influencing Stock Prices
The relationship between supply and demand alter the market prices primarily. When the supply is higher than the demand, the prices fall and when the demand goes above the supply, the prices rise. Other factors influence the supply and demand and indirectly influence stock prices.
When the performance of an organization improves or declines, it affects the stock prices. This can be inferred from earnings reports, new product launches, and company-specific news that gets released publicly.
Economic indicators such as interest rates, inflation and data about employment have an influence over market trends.
Risk Management
Traders must learn to handle risk wisely. A lack of a proper risk management plan can lead to disastrous results in the stock trading game.
Diversification: It is key to diversify investments and spread them out across domains and sectors. This will help balance out one’s portfolio.
Stop-Loss Orders: Using stop-loss orders which would automatically sell the stocks when price goes below a certain point. This helps in minimizing losses.
Research and Analysis: Regular research and technical analysis helps keep one’s portfolio safe and healthy. It is important to interpret chart patterns and indicators precisely. It is also vital to have a good understanding of company financials and market conditions.
Conclusion
Stock trading is a game and has some rules. But knowing the rules alone won’t help traders. One has to constantly educate themself and get creative to be at the top of their game. Exploring popular trading formats in the share market such as option trading and futures will help a trader upgrade themselves.
