Investment Guide for Beginners

The stock market is a dynamic entity with scores of patterns, trends, and movements, most of them highly unpredictable. It is not a place to randomly invest in stocks based on 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 to gain the know-how of the markets.

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 purchased physical shares and securities 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. One cannot trade directly in stock markets. You have to select a broker, who has a good understanding of the market dynamics to invest according to your instructions. A broker can either be an individual, company or agency.

However, brokers charge brokerage rates for providing their services. Select a trusted financial company providing 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, 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 are governed by changes in demand and supply. When investors are willing to purchase shares at a higher price, the price of a share increases. 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 based on 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 shows 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. Being enrolled in a certified course to understand the technical aspects of share trading is a great way to get started.

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 trading platforms along with technical charts and indicators.