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TAXAJ Corporate Services LLP - Financial Doctors

Stock Trading - Share Market : Rules, Benefits, Process

Online share trading involves buying and selling of stocks through online platform. Using the online share trading account, you may buy or sell share stocks, mutual funds, bonds, and other securities easily, without the need of intermediate broker or agent.

​Online Share Trading for Beginners

Share trading can be profitable if investors know the fundamentals of trade. The best way for a beginner to succeed in the share market is research. Research the best stockbroker who charges a low commission and yet provides the best services in terms of user-friendly interface, customer service, etc. Also, research your stock picks before placing a buy/sell order. Look at a company’s EPS, financial statements like P&L accounts, profit margins, future growth plans, etc. before investing in their shares. In the beginning, avoid highly volatile types of instruments, like futures and options. Another helpful tip while trading in the share market is discipline. Set your desired profit and stop-loss margins. Stop trading when you’ve reached these margins. It helps you to limit your loss as well as prevents you from being too greedy.

​Instruments Traded in Indian Share Markets

Instruments ranging from equities and IPOs to derivatives are traded at the stock market. Different instruments are traded by various online trading exchanges. The National Stock Exchange (NSE) and BSE Ltd. trades derivatives (Interest Rate Derivatives, Equity Derivatives, Global Indices Derivatives and Currency Derivatives), capital market (mutual funds, IPOs, traded funds, equities, stock lending and borrowing, debentures), debt market (corporate bonds, retail debt), etc. MCX Stock Exchange Limited (MCX-SX) deals with capital markets. Multi Commodity Exchange of India Ltd (MCX) and National Commodity & Derivatives Exchange Limited (NCDEX) offer commodities trading like gold, metals, agro-commodities, bullion, etc.

How to Invest in Stock Market in India

​​Differences between Online and Offline Trading Accounts

Trading

With an online share trading account, the users can place their own orders. On the other hand, an offline account means that users need to avail the services of a broker to place orders. Instructions are specifically given to the brokers in an offline trade, which creates dependence on the broking agency. Such dependence is non-existent when you choose to trade through an online account.

Convenience

An online stock trading account is a good option for people who have an Internet connection and track their orders from the convenience and comfort of their homes or offices. In case users are not able to access stock broking sites or do not have access to an Internet connection, placing orders on the phone with their brokers is more advisable.

Fraud

Because online share trading provides users complete control over the transactions, the risk of potential frauds is eliminated. There are certain instances when the brokers execute trades on behalf of their clients without receiving permission, which can cause significant losses to the users who choose offline trading.

Expertise & Knowledge

When users opt for an online stock trading account, they may get carried away. Without doing proper research and understanding more about how the stock market works, they may buy or sell shares, which can result in huge losses. Fortunately, most of the agencies that offer online trading services offer access to research reports and other technical and fundamental analyses to assist account-holders to gain a deeper understanding to make the right investment decisions.

Who are the regulators in the stock market?


The responsibility for regulating the securities market is shared by:

  1. Department of Economic Affairs (DEA)
  2. Department of Company Affairs (DCA)
  3. Reserve Bank of India (RBI)
  4. Securities and Exchange Board of India (SEBI)

Tell me more about SEBI?

SEBI is the regulatory authority in India established under Section 3 of SEBI Act 1992. Its role includes-

  1. Protecting the interests of investors in securities
  2. Promoting the development of the securities market
  3. Regulating the securities market

​What is the Depository and Depository Participant (DP)?

A Depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units, etc.) of investors in the electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities. At present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI.

A Depository Participant is an agent appointed by the Depository to provide its services to investors. Eg.: Banks, Financial Institutions and SEBI Registered Trading Members.

What should you look for in a DP?

1. Lowest transaction charges
2. Minimum transfer charges from Demat to Pool or any other Demat
3. No charges if shares kept in Pool Account
4. Requires no separate Demat Account
5. Allows shares kept in Pool Account to be used as Margin for trading
6. No interest charged till T+4 days on non-delivery of shares where ‘T’ stands for Trade Day

What is Intraday Trading ?

Intraday trading deals with buying and selling of stocks on the same day, during the trading hours that are stipulated by the exchange. Stocks are bought and sold in large numbers strategically with the intention of booking profits in a day.

e.g Intraday trading implies buying and selling securities on the same day.
Every day, the price of a security, say ABC Corp fluctuates. An intraday trader profits from this rise or drop of price which offers huge returns. Intraday traders also get the benefit of margin funding, whereby they can do transactions of up to ten times their account value which boosts their gains.

Intraday trading poses a risk of loss but there are measures to limit losses. Whenever Amit trades intraday, he monitors the market closely and seeks advice from TAXAJ team of experts. He also opts for stop loss which limits his losses to a minimum if any.

How to go about Intraday Trading ?

It is important to understand the fundamentals of intraday trading in order to make consistent profits. A good tip is to trade with the current market trend. If the market is falling, sell first and buy later, and vice versa. Make an intraday trade plan and stick to the plan. Set your desired profit and stop-loss limit. Do not be greedy. Instead, book your profits at regular intervals. Maintain stop-loss levels. It helps you to limit your loss if the market does not perform. Also, choose highly liquid shares and trade in a small number of shares at a time, if you are not a seasoned trader.

Although stock investing has several benefits, investors must also be cautious while making their decisions. Understanding the stock market basics  and doing their research before investing is advisable to mitigate risks and maximise returns.

What are the Benefits of Investing in Stock Market ?

The primary objective of investing is to ensure that every person is able to meet his or her future financial objectives. Rise in inflation makes it inadequate for individuals to simply earn and save some part of their incomes. To meet the price increases due to inflation, investments become important. The stock market is one of the oldest and most popular investment avenues due to several benefits of investing in stocks.

Higher Liquidity

In the Indian stock market, two exchanges, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) play important roles. Most companies trade their shares on either or both of these exchanges. This provides higher liquidity to investors because average daily volumes are high. Therefore, if an investor wants to buy or sell any product on the stock exchanges, this liquidity makes it easy.

Versatility

The stock market offers different financial instruments, such as shares, bonds, mutual funds, and derivatives. This provides investors a wide choice of products in which to invest their monies. In addition to providing investment choices, this flexibility is beneficial in mitigating the risks inherent to stock investing by enabling diversification of investment portfolios.

Higher Return in shorter Period

Compared to other investment products like bonds and fixed deposits, stock investing provide investors an excellent possibility of making greater returns in comparatively shorter time periods. Adhering to the stock market basics, such as planning the trade, using stop-loss and take-profit triggers, doing the research and due diligence, and being patient can significantly mitigate the risks inherent to stock investing and maximise the returns on share market investments.

Regulatory Environment & Framework

    The Indian stock market is regulated by the Stock Exchange Board of India (SEBI). The SEBI has the responsibility of regulating the stock exchanges, its development, and protecting the rights of the investors. This means when investors invest in financial products on the stock market, their interests are well-protected by a regulatory framework. This significantly helps in reducing risks due to fraudulent activities of companies.

    Acquire ownership & Right to Vote

    Even if an investor acquires a single share in a company, he acquires a portion of ownership in the company. This ownership, in turn, provides investors the right to vote and offer his contribution in the strategic movement of the business. Although this may seem like an exaggeration, it is true and there are several instances when shareholders have prevented company management from making unreasonable decisions that are detrimental to their interests.

    Convenience

    Technical development has influenced every aspect of modern living. The stock exchanges are also using various technical advancements to provide greater convenience to the investors. The trades are all executed on an electronic platform to ensure the best investment opportunities to investors in an open environment. In addition, broking service providers offer online share trading facilities that make investing convenient, because investors can place their orders through a computer from the comfort of their homes or offices. The demat account makes it easier for investors to hold all the products within their investment portfolio electronically in a single location, which makes it easier to track and monitor the performance.

    Although stock investing has several benefits, investors must also be cautious while making their decisions. Understanding the stock market basics and doing their research before investing is advisable to mitigate risks and maximise returns.

    How to Buy Shares or Deal in a Share Market ?

    In order to begin trading, you will require Demat and trading account, both available with leading stockbrokers. A Demat account will act as the common repository that allows you to store the shares you have purchased, whereas a trading account will facilitate the actual buying and selling
    activities. Here is some basic information you should know before you can start trading successfully in the Indian share market:

    The process of trading
    • When you buy a share using your trading account, money is transferred out of your bank account, and the share is transferred into your Demat account
    • When you sell a share, it is transferred out of your Demat account into the share
      market. The money resulting from the transaction will be made available in your bank account.

    How to learn stock trading?

    Choosing an online trading account

    To begin trading in the stock market, an investor needs to register for a trading account and a Demat account, which needs to be linked to the investor’s bank account for online money transfer. This is an essential step if you want to learn stock trading. This will familiarise you to the interface and give you access to the trading tools as well as research which can only be accessed by the clients of any stockbroking company. Know more about how to open a Demat account and a trading account.

    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.

    Educate yourself

    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.

    Practice with an online stock simulator

    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.

    Choose the Low-Risk High-Reward trading method

    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.

    Make a plan

    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.

    Find a mentor

    Every successful investor has had a mentor at some point in their investment journey. When you are new to the investment world and have just started learning stock trading, it is essential to find a person who has a fair experience in this field and can guide you through your journey. Your mentor can help you create a learning path, recommend courses and study material, as well as keep you motivated through the ups and downs of the market.

    Online/In-person courses

    There is a wide range of online and in-person courses available if a beginner wants to learn trading. These courses cover topics for investors/individuals at all stages of their stockbroking journey. You can also opt for the short-term stockbroking courses by NSE India.

    Share market basics

    As an Indian investor, the two share markets that you can trade in are:

    •  National Stock Exchange (NSE)
    •  Bombay Stock Exchange (BSE)

     

    The two depositories with which all depository participants are registered are:

    • National Securities Depository Ltd (NSDL)
    • Central Depository Service Ltd (CDSL).

    Two methods of trading

    Trading is one of the methods of how to invest money in the share market. It can be defined as active form of buying and selling of securities
    with an intention to make profit.

    Two types of 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 additional number of stocks, which would otherwise require you to invest greater amount of funds.

    Delivery trading 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.

    Between the period from April 2003 to January 2008, a major bull market trend was observed for about five years in Bombay Stock Exchange Index (BSE SENSEX) as it increased from 2,900 points to 21,000 points.

    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 positions & 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 owes 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.

    Electronic trading & floor trading

    The process of purchasing shares was very long and tedious before electronic trading had emerged. Investor calls the broker to place an order, the broker calls the order clerk who then relays the order to a floor broker, The floor broker executes the order and transmits it to the order clerk who then forwards it to the broker. Finally, the broker gives you a confirmation along with the fill of your order. With the emergence of electronic trading, the entire process of purchasing a share can be executed within a few seconds as opposed to the longer couple minutes’ time required with the traditional floor or pit trading method.


    Along with saving the time, the investor also has to pay a much lower brokerage cost when buying shares from an electronic platform. Clearly, the emergence of an electronic trading platform has led to steep decline in the number of floor brokers.

    Auction market & Dealer market

    An auction market is where the prices are dependent upon the lowest price a seller is willing to accept for their product/security and the highest price a buyer is willing to pay for that product/security. The sellers post competitive offers and the buyers post competitive bids. The matching bids and offers are connected and the transaction is made.


    Example: There are 3 sellers willing to sell the shares of Company X at Rs. 1200, Rs. 1250, and Rs. 1300. At the same time, there are 3 buyers willing to buy the shares of Company X at Rs. 1400, Rs. 1350, and Rs. 1300. Thus, only the order of the buyer number 3 and seller number 3 will be able to get executed since they have both agreed upon the same buying and selling price.


    A dealer market, on the other hand, is where the dealers post their selling and buying price. The dealers in such a market are designated as the “market makers”. They display their prices electronically, thus making the process transparent.


    Example: Dealer A owns some stocks of Company X that he is planning off-load. Price quoted by other dealers is 1300/1400. However, the dealer A posts a price of 1250/1350. Here, investors willing to buy the shares of Company X will purchase it from dealer A since it is Rs. 50 cheaper than the price marked by other dealers.

    How much you should invest

    How much financial risk you can tolerate should determine how much you should invest. Your investments should not endanger your savings. It is also important to diversify your portfolio and utilize features such as stop loss to minimize losses.

    What should you base your decisions on?

    Financial analysis:

    • 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:

    • 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. 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.