Investment Guide for Beginners

Stock markets can be both intimidating and alluring. While many stay away, the courageous venture in. If you wish to seriously start investing in stock markets, you should well remember that rather than being a place where fortunes are easily made, the market is a dynamic entity with scores of patterns, trends, and movements, most of them highly unpredictable. It is not a place where you can randomly invest in stocks on the basis of your gut instinct. Here, people with an understanding of the complex system and subsystems manage to survive and make profits. As a beginner, you should remember certain key concepts, which will put you on the right path to profitable trading in stocks.

Understanding the Basics of Stock Markets:

  • Major stock exchanges in India: The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the two major stock exchanges in the country. In India’s equity market, the majority of share trading is done here.
  • Market Indexes: Nifty and Sensex are the two market indexes for the Indian equity market.
  • SEBI: The Securities Exchange Board of India is the regulator for stock markets in the country.

The first step for trading in stock markets is to open a Demat Account.

What is a Demat Account?

  • A Demat account is also known as a Dematerialised account. Here the physical shares and securities that you have purchased are converted or dematerialised and kept in the electronic format.
  • According to SEBI’s regulations, you have to provide a PAN card, Aadhar card and six-month bank statement to open an online Demat Account.

The next step to trade in stocks and securities is to open a trading account

What is a Trading Account?

A trading account is used to purchase and sell shares in stock markets. Once you have an online Demat Account, and want to sell your shares, or purchase new securities, you need an online Trading Account.

Now you must remember that one cannot trade directly in stock markets. You have to select a broker, who will invest according to your instructions. You must remember to select a broker who has a good understanding of the market dynamics and can provide expert advice. A broker can either be an individual, company or agency. Brokers charge brokerage rates for providing their services. You can zero in in a trusted financial company providing a slew of services, including the hassle-free opening of share trading account, offerings like equity and derivative trading, along with an excellent brokerage platform.

How to Invest in the Stock Market?

Stock markets are governed by buying (bids) and selling (offers) of shares. Typically, the share trading occurs in two ways:

  • Going Long: Here, you first buy, and then sell.
  • Going Short: Here, you first sell, and then buy.

How is the Price of Shares Determined?

  • Stocks, just like any other product, are governed by changes in demand and supply. When investors are willing to purchase shares at a higher price, the price of a share appreciates. Conversely, when there are no buyers, the prices fall.
  • To calculate the price, stock markets have an Electronic Limit Order Book (ELOB), which records the matching bids and offers for a share.
  • The major stock exchanges have algorithm machines, which determine the price of shares on the basis of the volume of trading.

How to Evaluate a Stock before Investing?

You must evaluate the following crucial parameters of a company before purchasing its stocks:

  • Return on Equity: It shows the profit of the company after paying for all its expenses.
  • Return on Capital Employed: It shows the earning of a company through its long-term funds.
  • Debt Equity Ratio: It shows the capability of a company to cover all its outstanding debts, in the case of a downturn. It is calculated by dividing a company’s total liabilities by shareholder equity.
  • Interest Cover Ratio: It reflects whether the company can pay its interest expenditure on outstanding debts.
  • Gross Profit Margin: This also reflects a company’s financial health, and is shown as a percentage of sales.
  • Market Capitalisation: It shows the market value of a company’s outstanding shares. It is used to determine the size of a company.
  • Other aspects: You can also evaluate other aspects like company dividend history and shareholding pattern.

After understanding these key concepts, you should also look at the technical analysis of stocks. Various stockbrokers and financial companies provide detailed charts and reports which show trends and patterns, like movement average, Regarding Strength Index (RSI) etc. These charts can be analyzed to predict the price movement of stocks. You must understand that technical aspects will help you with intra-day trading. You can consider being enrolled in a certified course to understand the technical aspects of share trading.

Conclusion

You must master the basic concepts before starting to invest in stocks. Always remember to open a share trading account with a trusted financial partner. You must also ensure that you have access to state-of-the-art trading platforms along with technical charts and indicators.

Open Demat Account at IIFL