How to trade stocks: A beginner’s guide to stock trading
The stock market has been undoubtedly considered to be a pathway to wealth creation and enormous gains. But although the market has that potential, one cannot oversee the volatility it thrives in. Profits and losses are part and parcel of the share market. So, it is important you learn this guide of stock trading for beginners to minimize your losses by cutting down the amateur mistakes.
What is Stock Trading?
Trading is buying and selling shares in one day. But first, understand the markets it is done in, the primary and the secondary market.
The primary market is where the transactions happen between the issuers and buyers; here, the companies create new securities and offer them to the public.
The secondary market is where you can buy and sell shares issued in the primary market. The transactions happen between the seller and the buyer. In the secondary market, the stock exchange or broker functions as an intermediary.
Buying and selling a share on the same day is intraday trading. The traders book a profit or loss at the end of the day.
The Process of Stock Trading for Beginners
Begin your journey in stock trading with the following tips:
Open a Demat account.
The first thing you need to start off as a trader or investor in the share market is a Demat account or brokerage account. The Demat account acts like a bank account where you hold money for trading. The securities bought are maintained electronically in the Demat account.
Understand stock quotes
Stock prices fluctuate based on the news, fundamentals, technical analysis, etc. Gaining knowledge about these aspects will help you enhance your understanding of stock and stock markets. After this, you will be able to figure out the right place to enter and exit a trade.
Bids and ask price
A bid price indicates the maximum price an investor is willing to pay for a stock. The ask price is the minimum price the seller is willing to sell the stock. Deciding on the correct bid and ask price is essential to ensure a profitable trade.
Fundamental and technical analysis of stock
Plan your trading by conducting a thorough fundamental and technical analysis of the stock. Fundamental analysis is evaluating a security by calculating its intrinsic value. It considers the various dynamics like the earnings, expenses, assets, and liabilities. Technical analysis is the evaluation of a stock based on the stock’s past price and volume chart to predict its future potential.
Learn how to stop loss
Volatility is an intrinsic part of the share market. A beginner should hence understand how to prevent heavy losses. Ideally, you should set a stop-loss price to cut down losses when executing a trade. Failing to put a stop loss can drastically damage your capital.
Get expert advice
The unpredictable share market works on predicting stock prices, but one cannot always be accurate. Take expert advice to make the right trading decisions and make the right choices.
Suffering from a huge capital loss when first starting off can really put one-off. So, start with something safe, the less volatile stocks. It may be a slow start, but these stocks will likely sustain a good performance when the conditions turn hostile.
To trade or to invest?
While a trader buys and sells stocks within minutes, hours, or days, investors hold their purchases for months or years. Understand the difference and pick one so you can design a trading strategy for yourself and build a foundation for your stock market journey.
Learn the basics of the stock market
After picking trading or investing, get the basics right. Learn more about the major indexes, the stock market timings, the market movements, etc.
Do not skip learning the basics if you want to build your own trading/investing strategies. Master the basics for a few days to know what to do once you get a trading account.
Selecting a stockbroker
Consider the broker’s reputation, trading portal or software, and brokerage when choosing a stockbroker. Pay attention to the brokerage since you will have to pay for it even when you are losing on a trade.
Learn the different order types
There are various types of trade orders available now; Normal, Stoploss (SL), Margin Intraday Square up (MIS), Bracket Order (BO), Limit Order, Cover Order (CO). Know how different orders work to be a learned trader. As a beginner, stick to normal and stop-loss orders.
Avoid short-selling in the initial days.
Short selling is placing a sell order at a specific price and then buying the same, mostly at a lower price. Your profits depend on the difference in price multiplied by the number of shares sold.
When you are first starting off, it is wise to avoid using short-selling and first experiment with sell and buy.
Do not use the margin facility just yet.
Margin facility means placing trades with margin, meaning if a broker gives you a margin of 5x on your capital, you will be able to buy shares five times more than your trading capital. But these trades often need to be squared off before the market closes on the same day. So beginners should avoid this facility to avoid severe losses.
Do not enter the derivatives market either.
Futures and options make up the derivatives market; contract-based purchases with a fixed expiry date. This market allows you to make more significant purchases with little capital as well, and hence it is not for beginners.
Not everyone can trade stocks.
Yes, the stock market is highly rewarding, but it is not for everyone. You will need a lot of knowledge, skills, experience, and discipline to trade stocks successfully, and not everyone has the qualities or can develop them, so it is okay to fail.
Start off well
The stock market arena is complicated and risky, but you can actually pave the way for success and profits for yourself if you set the right foot first.
One more piece of advice before beginning stock trading for beginners is there is no such thing as quick and easy money here. So do not enter the market with unrealistic expectations and goals.
When considering stock trading, do not get into the innovative tricks and hacks to make money; instead, rely on time-proven tips that make you a better trader/investor.