How To Learn Stock Market Trading?

Introduction

The Indian stock market is an important part of the country's financial system. The Sensex reached an all-time high of 79,546 while the Nifty climbed to 24,124 on June 28, 2024. These numbers show the strong performance and potential of the Indian economy. No wonder it has been attracting a large number of investors of late. If you've been thinking about participating in this rising market scenario, it may be the right time to learn stock market trading.

In this guide, you will learn about the basics of stock market trading and what you need to begin trading. You will also learn some important terms that will prepare you to enter the stock markets confidently.

Basics Of How To Trade Stocks

Stock trading involves the buying and selling of company shares listed on stock exchanges. Shares represent ownership in a company. When you buy and sell shares, you also need to understand the stock market, its participants, and the infrastructure that supports trading. 

Who Are Stock Market Participants?

Some of the key stock market participants include:

1. Stock Exchanges: These are marketplaces where stocks are bought and sold. Major stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). They provide a regulated and transparent platform for trading stocks.
2. Retail Investors: These are individual investors who buy and sell stocks. As a retail investor, you can participate in stock markets through brokers facilitating your trades.
3. Institutional Investors: These are large organisations such as mutual funds, insurance companies, corporates, and pension funds that trade large volumes of stocks. 
4. Brokers: These act as intermediaries between buyers and sellers in stock markets. They execute trades on behalf of investors and charge a commission for their services.
5. Depositories: These hold securities like shares, bonds, and debentures in electronic form, facilitating easy and efficient transfer of ownership when trades are executed. In India, the two main depositories are the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Who Regulates Indian Stock Markets?

The Securities and Exchange Board of India (SEBI) is the stock market regulator in India. Its role is to protect investors' interests, promote and regulate market functioning, and ensure its development. This includes ensuring transparency, preventing malpractices, and overseeing the operations of stock exchanges and market participants.

What Do You Need to Start Trading in Stocks?

Now, to begin stock market trading, you will need the following:

Demat account: A Demat (Dematerialized) account holds your shares in electronic form. You can open a Demat account with a trusted broker or broking platform that is SEBI registered. 

Trading account: This account is linked to your Demat and bank accounts. It is used to place buy and sell orders and facilitate securities transactions.

Bank account: Your trading account must be linked to a bank account to easily transfer funds. 

Stock Market Trading for Beginners

You can follow the steps given below to begin trading in stock markets:

Step 1 - Open A Demat Account

To trade stocks, you must first approach a registered broker and get yourself a Demat and trading account. Make sure to opt for a broker who has a good reputation and offers competitive broking charges/brokerage fees.

Step 2 - Understand Stock Quotes

Whenever you buy something, the first thing you would want to look at is its price. Similarly, for stock trading, you must first see the prices. In stock market parlance, stock prices are shown in the form of quotes, including the bid or buying price and ask or selling price.

You can find stock quotes on the trading or investment platform provided by your broker. Stock prices will help you narrow down the stocks that you wish to trade in.

Step 3 - Gain Fundamental And Technical Knowledge Of Stocks

There are thousands of stocks available to trade on stock exchanges. You can use fundamental and technical analysis to find out the right stocks to trade. 

Fundamental Analysis is a process through which you can evaluate a company's financial health. It involves analysing a company’s financial statements, knowing about its management, studying the industry conditions, etc. Fundamental analysis lets you understand whether the stock is worth its quoted price.

Technical Analysis involves using a stock's historical price and volume data to forecast its future price movements. Here, you must look at stock price charts and understand the different patterns to make trading decisions. Patterns are specific shapes and trends that stock prices form on the charts. 

Also read - How to invest in stock market for beginners

Step 4 - Learn To Use Stop-Loss Orders

Once you know the price of a stock and have decided whether it is good to trade, you can go ahead and execute it. However, stock trading can be risky, and you may incur losses. To minimise losses, you can adopt effective risk management strategies while trading. One of the effective tools of risk management is stop-loss.

A stop-loss order helps limit your losses. Here’s how it works:

While setting up a stop-loss order for a stock, you have to choose a price at which you want to automatically buy or sell the stock. If the stock price moves beyond this predetermined price, the stop-loss order gets triggered, and the stock is bought or sold automatically.

This way, you can avoid significant losses if the stock price moves away from your desired level. 

When starting with stock market trading, it makes sense to use a small amount of capital and invest in blue-chip stocks. These are stocks of well-established, financially stable companies. Therefore, they may be less volatile as compared to stocks of smaller or medium-sized companies. As you gain experience in stock trading, you can expand and diversify your portfolio with other types of stocks and securities.

Also read - How to Become Pro in Equity Market?

Commonly Used Terms In Stock Market Trading

When you begin trading in stocks, you may come across these commonly used stock market terminologies. 

- Bull market: Refers to a period or phase when stock prices (in general) are rising.
- Bear market: Refers to a period or phase when stock prices (in general) are falling.
- Market order: It is an order to buy or sell a stock at the current/ongoing market price.
- Limit order: It is an order to buy or sell a stock at a specific price / user-defined price.
- Dividends: A portion of a company's earnings distributed to shareholders.
- IPO (Initial Public Offering): A process through which a company can offer its shares to the public for the first time. Companies get listed on stock exchanges through an IPO.
- Liquidity: How quickly and easily a stock can be bought or sold without impacting its price. Stocks with high liquidity can be traded faster and more efficiently.
- Stock market index: It is a tool that measures the performance of a group of selected stocks. Examples are Sensex and Nifty. 
- Sensex: The stock market index for the Bombay Stock Exchange (BSE) in India, tracking the performance of 30 well-established and financially sound companies.
- Nifty: The stock market index for the National Stock Exchange (NSE) in India, tracking the performance of 50 top companies across various sectors.