How to Trade in Indian Stock Market – Beginners Guide

The only way you can create wealth in equities is through appropriate risk management. Read on to know what are the things you need to focus on.

Nov 04, 2018 04:11 IST India Infoline News Service

When you begin trading in the equity markets in India, your first task should be to identify a broker and open your trading-cum-demat account. Then you draw up the fine print of your client-broker agreement. Once the formalities are completed, you are ready for trading. As fascinating and exciting the equity market appears, it is also an asset class that carries a higher level of risk. The only way you can create wealth in equities is through proper risk management. As a beginner in the stock markets, what are the things that you need to focus on? Here is a cheat sheet!
 
10 things that every stock market beginner should focus on:
  1. First, open the trading-cum-demat account. How do you select the broker? It is always better to opt for a broker who has been in the business for at least 10-15 years. They are more familiar with stock market cycles and hence in a better position to advise and guide you. Also, their risk management systems are more robust.
  2. Today, you can open a trading account online or offline using Aadhaar as authentication. Make it a point to read the fine print of the agreement before signing. What are your rights and liabilities? How is the broker’s role defined? Check the brokerage rates for different products before attesting your signature.
  3. There are two items of procedural importance here. Insist on getting your contract notes daily by email and reconcile with your trades. Also, never pay your broker or the RM by cash or bearer-cheques. All payments must be done by cheque/NEFT/RTGS only. This audit trail for your transactions is very essential.
  4. Set your risk parameters clearly. Define how much you are willing to lose in trading in a day, in a month, and overall. The moment you hit these limits, corrective action should be taken immediately. As a trader, your primary task is to protect your capital.
  5. In the stock markets, your primary weapons as a trader are the stop loss and the profit target. Never get into a trade without these two parameters. A stop loss is an insurance against market volatility. The stop loss limits your loss if the trade goes against you. Profit booking is essential to churn your capital. A trader must not get stuck in a position for too long.
  6. Quite a bit of wisdom is required when placing your order. For example, if the markets are volatile, you would be better off using limit orders to avoid any negative surprises. On the other hand, if markets are falling sharply, then market orders can serve you better in case of a buy order. Each time you are lax in placing your orders, you don’t get the best possible price. This adds to your trading costs.
  7. Don’t ignore costs; they do matter in case of trading. When you trade in equities or even in futures and options, there are a plethora of costs. There is the brokerage, and on top of that, statutory charges such as GST, stamp duty, securities transaction tax, turnover tax, and exchange fees. On a conservative basis, they add nearly 50bps to your cost both ways which makes a big difference to your break-even point.
  8. If you are trading online, then understand the process flow clearly. After placing your buy/sell order, you can go to the order book and check it out. The order can be cancelled or modified as long as it is still in the order book. Once the order is executed, you cannot change the order as it goes into the trade book. At the end of the day, reconcile your trades with the contract note and periodically ensure that the ledger is showing the correct information.
  9. As a trader, you are exposed to a host of news flows. You need to be very discerning. Don’t believe and act on every tip that you receive via SMS or WhatsApp. Avoid buying stocks just because a star investor or trader is buying the stock. Don’t buy the talk of assured returns on stocks. Firstly, assured returns are not possible in the stock markets, and secondly, Sebi does not permit any broker to assure returns to investors.
  10. Finally, ensure that the back-end functions smoothly. When you buy shares, your bank account should get debited on the T+1 date and your demat account should be credited on T+2 date. Similarly, when you sell shares, your demat account should get debited on the T+1 date and the bank account should get credited by T+2 date. Also, ensure that corporate actions like dividends to your bank account and splits and bonuses to your demat account are credited on time.

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