It has recently been on the upsurge, especially for young investors looking to accumulate wealth over time. To a beginner, though, it can be intimidating and overwhelming with all its jargon, technicalities, and steps involved. Knowing the basics, how the stock market works, starting and managing investments is imperative for starters in the art of stock trading.
This is an all-round guide that will walk you through the whole procedure of stock trading in India-from how to set up your trading account to understanding market trends and how to place your first trade. By the end of this post, you’ll be very well aware of what it takes to get started with stock trading in India.
1. Understanding the Stock Market in India
Before setting foot into the world of stock trading, one must know about the functions of the stock market in an economy. In India, stocks are traded on two major stock exchanges called:
National Stock Exchange (NSE): NSE is the largest stock exchange in India in terms of turnover. The most renowned indices hosted are NIFTY 50, which tracks the performance of 50 major companies listed on the exchange.
Bombay Stock Exchange (BSE): BSE is Asia’s oldest stock exchange. It carries thousands of companies, one of whose major indices is BSE Sensex, represented by the 30 largest as well as the most actively traded stocks.
Both the exchanges are regulated by the Securities and Exchange Board of India (SEBI), the regulatory body that ensures transparency in the market as well as its fairness.
2. Forms of Trading of Stocks in India
There are two kinds of stock trading in India:
a. Intraday Trading:
In this, the stocks are bought and sold on the same trading day, capturing short-period price movement in an attempt to gain profits by frequent trading during the day.
b. Delivery-based Trading:
Here, you buy the stocks and maintain them in the demat account for a longer period of time with the hope that their price goes high over time. You can sell such stocks at any time but have to maintain them in your demat account.
Delivery-based trading is always recommended to beginners as it involves the lowest amount of risk as compared to intraday trading, which makes you sit on the screen watching the market movement all the time.
3. Basic Pre-requisites to Start Trading in India
Stock Market For all this, a few basic things need to be set up before you start trading.
a. Demat Account:
A Demat account is an electronic account where you hold shares. It is similar to a bank account, but it does not store money; it holds all your stocks. To keep all your securities in electronic format and for the reason of eliminating actual certificates, you need a demat account.
b. Trading Account:
A trading account needs to be there so that you could trade in the stocks within the market. It acts like an intermediary bridge between your Demat account and your bank account. A trading account helps execute orders and gives the possibility of transferring your stocks between the Demat account and trading account.
c. Bank Account:
A banking account is essential to facilitate money transfer when you buy and sell shares. Your bank account is linked with your trading account for easy money movement.
d. PAN Card:
If you wish to participate in the stock market, you will need a Permanent Account Number (PAN) card. This is the tax identity number and tracks every transaction happening for your taxation purpose.
e. Aadhar Card:
An Aadhar card is mandatorily required for verification of identity and brokers use it to ensure that your details match the government database.
f. KYC (Know Your Customer):
The brokers would insist on doing a KYC with their clients as part of meeting the requirements of the regulatory bodies. This would include getting essential documents like PAN, Aadhar, and information related to your bank account for the verification of your identity.
4. Choosing a Stock Broker
To trade in the stock market, you would require a stockbroker that acts as a link between you and the exchanges. There are a number of stockbrokers in India to which you could go. You have the option to select from the following two:
Full-service brokers: These brokers provide research, advisory services, and personalized support. Some of these include ICICI Direct, HDFC Securities, and Kotak Securities.
Discount brokers: The discounters are for low-cost trading and will suit best for self-traders who require least guiding. Examples include Zerodha, Upstox, Angel One, etc.
When one makes a decision regarding a specific broker, he would think about factors like brokerage fees, the interface of the trading platform, customer support, and research tools available.
5. Terminology used in the Stock Market
You need to know the basic stock terms even before executing your first trade. Here are a few common terms you should know:
Stock/Share: A share is the unit of ownership in a company. Buying shares equates to being the partial owner of that company.
Types of Orders: The two most ordinary types of orders are Market Orders (which settle right away, at the market price prevailing) and Limit Orders (which put in a price or better).
Bid Price and Ask Price: It is the highest price which a buyer would pay for a stock and it’s the lowest price at which a seller sells.
Volume: It measures the shares traded in a specific stock within a specified period.
Stock Index: Indices like NIFTY 50 or Sensex are used to monitor the general performance of the market or a specific industry.
Bull Market and Bear Market: A bull market refers to rising stocks. Conversely, a bear market is characterized by dropping stocks.
6. Gathering Information About Stocks
Buying shares is thoroughly research-oriented. The more information you have about the companies on which you are investing, the more profitable your trades would be. Here’s how you can start researching:
Fundamental Analysis: This involves analysis of a company’s financial statements, earnings reports, management, competitive advantage, and market position. Important numbers are earnings per share (EPS), price-to-earnings ratio (P/E ratio), and return on equity (ROE).
Technical Analysis: It is a study of past market data, particularly price and volume, to forecast future price movements. These include candlestick charts, moving averages, and Relative Strength Index (RSI).
News and Updates: Keep updated about all news locally and globally that might impact stock prices. Corporate announcements, government policies, and geopolitical events impact the stock market.
7. Opening Your First Trade
Now that you have selected a stock and have done all your research, it’s time to put your first trade. This is how you do it:
a. Entering Your Trading Account:
You can log in on the trading software account using your login credentials.
b. Pick Stock
You can look for the stock you might like to buy through its ticker or find it in categories like large-cap, mid-cap, or small-cap stocks.
c. Specify Number of Shares
Enter the number of shares you want to purchase into the order box.
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d. Specify Order Type
Market Order or Limit Order? A market order executes immediately at the prevailing market price whereas a limit order executes only if the stock price reaches your specified price.
e. Review and Confirm:
Once you have placed your order, check all the details carefully including the stock symbol, quantity, price and total cost. You can confirm an order, which will then be executed according to the type of order selected.
8. Monitoring Your Investments
Monitor your investments once you have placed your trade. Keep track of stock prices, quarterly earnings reports, and any news regarding the companies you have invested in. Periodic review of the portfolio will help you to make adjustments and avoid losses.
9. Risk Management and Diversification
Stock trading involves risks. Beginners should understand that there are losses involved in the process. To minimize risks:
Spread your investments across different stocks or asset classes. Some excellent alternatives are bonds or mutual funds. Do not park all your money in one stock or sector.
Install Stop-Loss Orders. A stop-loss order sells your stock automatically whenever the price falls below a specific level, thereby helping to somewhat limit potential losses.
Avoid Emotional Trading: Stock markets can be very volatile and may make one make a lot of bad decisions because of emotions. Stay with your strategy and goals.
10. Learning and Improvement
Stock trading is a journey, and it will take time to become fluent. Continue learning by reading books, taking online courses, following financial news, and practicing with virtual trading platforms.
Conclusion
It’s a very rewarding process in which one can build his or her wealth through stock trading in India, but it’s a time-consuming and knowledge-intensive affair to be successful. First, one needs to understand the basic market and create the required accounts and research before making one’s first trade. These steps, as mentioned above, and a disciplined approach will help become a successful stock trader in India.
Happy trading and remember to always invest responsibly!