The Basics of Stock Market

Playing the stock market right can prove to be very lucrative. It comes across as a complicated space, admittedly - however, here are the 4 stock market basics to help you get started right away.

Ambitious Indians are becoming more open to investing in the stock market. Although the numbers of those who trade are still limited to only 1% of the market, this still amounts to 300 million people. Most of them will have a delightful success story to share. Some people do so well and master the art so perfectly that they completely do away with their day jobs. You can jump on the stock trader bandwagon and pave your way to a richer future, provided you understand the necessities of doing business on the stock market. The first step to doing so is to understand in detail the basics of the stock market. Here, we give you the lowdown on everything stock market-related.

Open a trading account

The first box you need to check from the list of stock market basics is a trading account. A trading account, as the name suggests, allows you to trade shares on the stock market. Whether you want to buy securities, buy futures & options (F&O) or make your money through intraday trading, the first thing you will need is a trading account. In addition to a trading account, you would also need to open a DEMAT account, in order to trade seamlessly and conveniently.

Choose your trading/depository partner (or the platform on which you open your demat and trading accounts) with care. Your partner should offer you competitive brokerage rates, back-end support, technical efficiency and expert advice. After all, like with any new endeavour, one would likely need a degree of hand-holding for a successful experience on the stock market.

Stop loss and target price

Once you have opened your trading account, you are ready to begin trading. Before you place a buy order for any stocks, be sure to zero in on a stop loss. Simply put, a stop-loss specifies that a particular share should be sold once it breaches a predetermined limit.

Losses are an everyday reality on the stock market - it is imperative that you acknowledge and mitigate potential losses. A stop loss order, which you set with your broker before a buy or sell, minimizes your risk. A key differentiation is to be noted here: a stop loss does not avoid losses altogether but keeps risks within a limit that you deem sustainable.

It is similarly important to set a logical target price based on research of how the stocks prices have risen and fallen in the recent past.

For example, let’s assume you have purchased shares at Rs 110 per share. You set your target price at 112 per share. You must acknowledge that the price can either rise to Rs 112 or more, or even dive to Rs 105 or less. As a result, you could set your stop loss at Rs 108. That way, should the stock price fall, you take a hit of only Rs 2 per share. Your broker will automatically sell your shares if the price dips to Rs 108.

Technical charts and indicators

To arrive at the right stop loss and target price, you will need to have a very precise understanding of how a given stock's price has performed during different times of day and on different days. Observing a stock for a few weeks before buying in is non-negotiable. Without this, you are going in blind.

Handpick a manageable basket of stocks and observe them on a daily basis. Be sure to pour over various technical charts and indicators. On the IIFL website, you can browse, view and study these charts live, to arrive at well-informed trading decisions.

Additionally, allocate some time on a daily or at least on a weekly basis to scale up your know-how. Read articles and visit forums that give you stock advice and tips. Be sure to read the literature and expert guidance communication that comes in from your broker.

The right psyche

When there is a ton of profit to be reaped, even the best of us find it challenging to not get carried away. However, getting carried away while trading on the stock market can cost you actual money dearly. Before beginning, conduct research and experiments to test the waters.

If you choose to conduct an intraday trading experiment, to understand the workings of the market, choose a time of day that suits you. Once you have chosen a particular time of day, stay consistent to that time. The recommended time of day for beginners is said to be 9.30 to 10.30 am, when the stock prices show enough volatility (that means the prices are rising and falling enough to make profits) and relatively low risk.

Emotions are a big no-no when trading. You must rely on logic and researched facts and figures. Rein yourself in with regards to the following:

  • Nobody can tell you that a given stock is most certainly going to perform in a predetermined manner. Make your decisions based on hard numbers and ignore rumours.
  • Do not get self-indulgent and stay in the game after you have achieved your target price.
  • Avoid being too conservative when setting a stop loss because that could also limit your potential to make profits.

Conclusion

: Now that you are savvy with the top four must-know concepts in stock market trading, you have understood the pillars of what contributes to making profits on the stock market. As a beginner, you will require disciplined efforts to witness earnings from trades. Daily dedication and unwavering attention to these stock market basics can make your money grow by leaps and bounds as a novice stock market player.

Open Demat Account at IIFL