Stock Trading - Share Market : Rules, Benefits, Process

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.