The trading world is extensive and can be exhaustive, especially for beginners. While for many of you, the thought of losing your hard-earned money can be nerve-wracking. Yet, the brighter side of the trading world is the perfect opportunity it offers to grow wealth. But how do you crack the hack?
The first and foremost requirement is confidence in starting your trading journey. Next, place a small budget aside, so you are not afraid of losing your money and can conveniently learn the art of trading. Two essential parameters to keep in mind are patience and practice. Patience will enable you to make mindful decisions and practice will help you excel in the market.
Now, let us first comprehend in-depth
What Is Trading?
Trading involves buying and selling financial instruments like stocks, bonds, commodities, or currencies to profit from short-term price fluctuations. Primary markets and secondary markets are the two basic categories of stock markets. These two types are interconnected and function together as part of the overall stock market ecosystem.
1. Primary Market:
The initial sale of stocks by a corporation to the public through an initial public offering (IPO) is referred to as the primary market. Companies issue shares in the primary market to raise money for a variety of uses, including growing businesses, supporting new initiatives, or paying down debt.
2. Secondary Market:
The secondary market, commonly known as the stock exchange, is where investors buy and sell previously issued securities, such as stocks and bonds. Securities already issued in the primary market are traded on this market by both retail and institutional buyers. Investors have access to liquidity in the secondary market, which enables them to buy or sell assets following their investment objectives and the state of the market.
Before you start trading in the stock market, you should learn about various types of financial instruments. Some of the common types include:
- Stocks: These represent ownership in a company, providing stakeholders with a share in the company’s profits through dividends and voting rights. They are traded on stock exchanges or stock markets like NSE, BSE, Nasdaq, NYSE, LSE, and others.
- Bonds: Debt instruments issued by the government, municipalities, or corporations, bonds enable the entities to raise capital through bonds. The bondholder lends money to the issuer in exchange for a bond for periodic interest payments. In bonds, the principal amount is returned at maturity.
- Mutual funds: The mutual fund pool investment from multiple investors to create a diversified portfolio. This portfolio usually contains various financial instruments. The port is managed by professional fund managers.
- Exchange-traded Funds (ETFs): These investment funds are traded on stock exchanges like stocks, tracking specific indices or asset classes, offering liquidity and diversification.
- Options: These offer the holder the right options and not any obligation to buy or sell underlying assets at a specific price.
- Futures: These are agreements to buy and sell an underlying asset like currencies or commodities at a predefined price and future date, traded on future exchanges.
- Derivatives: Financial contracts whose value is derived from an underlying asset like the future, options, swaps, or contracts are known as derivatives. These are used for arbitrage, speculation, or hedging.
However, these are just a few of the financial instruments. Yet, remember that each of them has its own risk and provides returns depending on various factors. You must research further to know about them before investing in any.
The next step after knowing the financial instruments, is how to start stock trading.
1. Open a Demat account
To start trading you first need to open a Demat account, which is an online account that holds your shares and allows you to trade them. A Demat account is different from a bank account, as it does not store money but securities. To open a Demat account, you need to choose a broker or a depository participant, who will act as an intermediary between you and the stock exchange. Along with this, you need to provide the necessary documents. These include your identity proof, address proof, and PAN card. You need to pay the account opening fees as some brokers charge fees for opening a Demat account.
2. Learn the basics of technical analysis and fundamental analysis
Learn the basics of technical analysis and fundamental analysis, which are methods of evaluating the performance and value of stocks based on charts, trends, indicators, financial statements, etc. Technical analysis focuses on the price movements and patterns of stocks, while fundamental analysis focuses on the underlying business and financial aspects of stocks. Both these analyses have their pros and cons. Use these tools in combination with other factors. This will ensure that you achieve the expected returns.
3. learn what stop loss is and how to apply it.
Learn what is stop loss and how to apply it, which is a way of limiting your losses by setting a price at which you will automatically sell your shares if they fall below it. A stop loss is a very crucial tool to manage your risks. It can help you protect your capital and avoid losing more than you can afford. You can set a stop loss either as a fixed amount or as a percentage of your investment. For example, if you buy a stock at Rs 100 and set a stop loss at Rs 90, you will sell it if it drops to Rs 90 or lower. Alternatively, you can set a stop loss at 10%, which means you will sell it if it drops by 10% or more from your entry price.
4. Get information from experts
Never get learning in your trading phase. Try to get information from experts. They can guide you and give you tips and recommendations. To know more you can take the help of books, articles, blogs, and podcasts. These resources will teach you more about stock trading and the market. However, you should not blindly follow anyone’s advice or opinion, as they may not suit your goals or risk profile. You should always do your research and analysis before making any decision.
5. Go for paper trading first
Start with paper trading first. It is a way of practicing stock trading without using real money, by using a simulator or a demo account. Paper trading can benefit you in many ways. Such as it will help you test your strategies and learn from your mistakes. It will also help you gain confidence and familiarize yourself with the trading platform and tools. However, paper trading cannot fully replicate the real market conditions and emotions that come with trading with real money. Therefore, you should not rely on paper trading results alone and be prepared for the challenges and risks of real trading.
6. Start to develop a strategy
Develop a strategy, which is a plan of action that defines your goals, risk tolerance, entry and exit points, etc. A strategy can help you stay focused, disciplined, and consistent in your trading. You should also have a trading journal or a record of all your trades, where you note down the reasons for entering and exiting each trade, the outcome, the lessons learned, etc. With a trading journal, you will be able to track your performance, identify your strengths and weaknesses, and improve your skills.
7. Start with safer stocks
Start with safer stocks, such as blue-chip stocks or index funds, which are less volatile and more reliable than speculative or penny stocks. Safer stocks can help you reduce your risk. It will build your confidence as a beginner trader. They can also provide you with steady returns and dividends over time. However, safer stocks may not offer high returns or growth potential as compared to riskier stocks. For this reason, you must balance your portfolio with different types of stock. Keep your risk appetite in mind while choosing stocks.
Which stocks to choose and how to choose?
Always rely on your research to decide which stocks to choose. Before choosing any stocks keep your preferences, objectives, research, and analysis in consideration. To decide, there are various criteria that you can use. These include market capitalization, earnings growth, dividend yield, price-to-earnings ratio, etc. to filter and select the stocks that suit your needs. You can also use various tools such as screeners, scanners, watchlists, etc. to find and monitor the stocks that interest you. However, you should not buy or sell any stock based on impulse, rumors, or hype. Always research and do your due diligence before buying any stock.
Learn from your mistakes
Learn from your mistakes and improve your skills and knowledge by reviewing your trades, keeping a journal, managing your emotions, etc. Stock trading is a continuous learning process, and you will inevitably face some losses and failures in this journey. However, you should not let them discourage you or affect your judgment. You should treat them as opportunities to learn and grow as a trader. You must ensure you don’t let your emotions interfere with your trading decision. You should always follow your strategy and stick to your rules.
Once you are in the stock market, you must know that it requires a lot of hard work and patience. With risk, it also has a certain level of uncertainty. You should not enter the stock market with unrealistic expectations or emotions. You should enter it with a clear plan, a solid strategy, and a rational mind. Follow the steps outlined above to start your stock trading journey with confidence. You can also improve your stock trading skills and performance over time by learning from your mistakes and successes.