Stock Market Trading Basics

  Stock trading - an introduction This article is designed to introduce beginners to the attractive world of trading. Trading can be ...

 

Stock trading - an introduction

This article is designed to introduce beginners to the attractive world of trading. Trading can be a very exciting and useful endeavor and the main attraction for many people. You can do it from almost anywhere. The main reason why people trade is to make money, in simple terms, we buy a financial product and then sell it later for a higher price. The product can be stock of a company, a futures contract or even a foreign currency. A lot of people fail to make money, so make sure you understand about why traders fail.
A share makes the holder a partial owner of the company and different types of shares have different rights coupled with them. If you are able to sell off your share at a price higher than your buying price, you make a profit but you also run the risk of incurring a loss if the share price falls. The business you invested in makes profit and they provide you part of it as dividend. In the share market you are an unidentified player and many have made a reasonable profit. There is no unique principle to ensure consistent gain but before you get into this market you should know the basics of stock trading.

What does Stocks Trading mean?

Stock trading came into action with the arrival of stock markets and these markets came into existence when companies decided to raise money with the help of selling their stocks. Every day lots of people get involved into stock trading and many people are planning to trade. Stock trading as well as day trading and other types of financial activities can seem very complex and even confusing but it's not actually so. Before you start trading it is essential to know its benefits and drawbacks.
Buying and selling of stocks is referred as stock trading in the financial market. You have to approach a broker in order to trade. You can trade either electronically or on the exchange floor. Exchange floor scene must be familiar to you. Here your broker arranges for your shares to be ordered. The floor clerk locates the floor trader from whom the shares can be bought. Once the price is agreed upon, the deal is finalized. In online trading your broker will connect to the exchange network and search for a buyer or seller according to your order.

How Stock Trading Works?

Trade means to buy and sell in the terminology of the financial markets. How a system that can accommodate one billion shares trading in a single day works is a mystery to most people. No doubt, our financial markets are marvels of technological efficiency. They will handle your order for 100 shares of “BHEL” with the same care and documentation as the order of 100,000 shares from another person.
To become a successful Trader you don’t need to know all of the technical details of buying and selling stocks; however it is important to have a basic understanding of how the markets work.

Two Basic Methods of Trading

There are two basic ways in which trading can be done they are :
Exchange floor Trading
Electronic Trading

Exchange floor Trading

Trading on the floor of BSE is the image most people have in their mind. Thanks to television and the movies of how the market works. When the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. In Exchange floor trading traders will directly go to the market and trade with the help of a human broker.

Electronic Trading

The electronic markets use enormous computer networks to match buyers and sellers, rather than human brokers. While this system lacks the romantic and exciting images of the BSE floor, it is efficient and fast. Many large institutional traders, such as pension funds, mutual funds, and so forth, prefer this method of trading.

Advantages of Trading

• Self employed – You can be your own boss
• Geographical freedom – You can trade from any corner of the world
• Minimal capital – You can start Trading with relatively small capital
• Unlimited potential for profit – Possibility to earn profit is very high
• Flexibility with time – You can choose when you trade and when you don’t
• Almost anyone can do it – If you are 18 you can open a trading account and begin

Disadvantages of Trading

• No guaranteed success – There is no guaranteed returns
• Can be stressful and emotional – when you are Trading with your own money, this is almost expected
• Lonely existence – trading can be a very lonely profession

Trading vs. Investing

Generally, investing involves buying shares/stock for long term capital growth. Most people, even those who have never purchased shares before, are familiar with this traditional approach to the market. For many years a ‘buy and hold’ approach has been the thumb rule for many investors in the stock market. After recognizing a potential solid large company, shares would be purchased and locked away in the shelf. The ownership was similar to a marriage in that it was undertaken for ‘better or worse’. Through good and bad times, an investor would be secure in the knowledge that the company would pay periodic dividends and that over many years, would return steady capital growth.

Trading on the other hand, involves buying and selling more regularly in search of small and consistent financial gains. People have been trading for many years and those who are successful generally enjoy all of the advantages. Trading has a greater potential for reward than investing but with that extra potential for reward is greater risk. Those who trade well have been well educated and prepared. It is very are that somebody start trading and make money from day one. Often you will hear the saying ‘Only Educated Traders Survive’. It means if you want to be a successful trader you should be well aware of the market and stocks. 

Questions to be answered before deciding to buy a Stock

Following are the questions to be answered before deciding on which stock to buy.

• 1. Do you know the company well enough?
• 2. What is the company’s reputation in the market?
• 3. Have you gone through their annual report?
• 4. Do you have the confidence to invest in this company?
• 5. Is some negative news about the company circulating?
• 6. How are analysts predicting the future?
• 7. How is the management of the company?
• 8. What are their growth prospects?
• 9. Am I aware of the insider activity?
• 10. Is it an internationally renowned company?
• 11. How is their marketing strategy?
• 12. Have there been any changes in the management recently?
• 13. How consistent has been their performance?
• 14. Has there been a sudden shift in their production?

Whenever you invest you should be aware of your limits and remember not to exceed them. Share market involves lot of risk; risk taking could either lead to fortunate gains or to huge loss it can lead you to bankruptcy also. Concentrate on the following factors before investing.

• You should avoid investing money more than you can actually afford.
• Know about your investment well and do not blindly depend upon your broker.
• Follow regular stock market quotes to keep yourself abreast of the market swings.

The share offers you an earning power, gives you partial ownership of a company and the freedom to buy or sell at any time. But if you are a beginner in stock trading you need to play safe and equip yourself with a lot of information.

What Is Margin Trading?

There are day traders that sometimes borrow money to practice their trade which is known as margin trading. There is no cost to day trader for the margin benefit since margin interests are typically only charged on overnight balances. It can be either extremely profitable or extremely unprofitable because of the nature of financial leverage and the rapid returns that are possible. High risk profile traders can generate either huge percentage of returns or huge percentage of losses in their cash. Thus day traders are sometimes portrayed as 'gamblers' by other investors because of the high profits or losses born by them.

Day Trading Strategies

Prepare for ups and downs of the market
Avoid worthless rumors

To some, stock market day trading is a good way to earn money with a bit of gambling. But you need to have some idea about day trading strategies so that you get good profits out of it. However once you get into day trading, then you have to devote your whole life into the stock market.

Prepare for ups and downs of the market

When you invest money in the Indian stock market, you need to be fully prepared for ups and downs in the market. The value of the stock may rise or fall down in a single day. So each trader makes his or her own strategy in order to earn maximum results. There are traders who do their trading from their computers but this does not mean that trading can be done only through the computers. There are some traders who make the use of their phones. Whichever method you utilize, but the important thing which you have to do is to make a good research. You should be able to study the whole market very carefully so that you do not lose any cash investing in the stock market.

Avoid worthless rumors

Apart from studying the market about NSE, BSE, etc, you should also take some precautionary measures. You must always avoid worthless rumors about the companies by people who do not know much about them. This people just make you confused. So, you need to avoid this type of people. It is always better to buy stocks when they are available in low price and then sell them at a higher price in the market. There is a limit on the gains from a single share in the stock market day trading. So, you should always try to buy and change stocks in regular intervals.

Day Trading Techniques for Individuals

Individual day trader should keep the following things in mind to succeed in day trading

• 1. I will Trade small.
• 2. I will not Trade without stop loss.
• 3. I will win and walk out.
• 4. I will lose less and walk out. Some days are bad.
• 5. I will not get unduly swapped by the market noise.

Tips to help you in being a good Intraday Trader

Following tips will help you to become a successful Intraday Trader.

• 1. Start with a realistic goal in mind.
• 2. Never make the mistake of believing that you have become the master.
• 3. Draw up a trading plan.
• 4. Make a commitment
• 5. Take a break
• 6. Take Professional Help

1. Start with a realistic goal in mind.

First you have to make a decision whether you want to become a trader or seek an employment. Always keep a realistic goal in your mind about what you want to achieve from the stock market. That will help you to achieve the goals.

2. Never make the mistake of believing that you have become the master.

No one is perfect in stock market, learning never ends here. One should not feel he/she is an expert if they make money in 5-6 trades without any loss. One should keep himself open for new learning and appoint consultants for him.

3. Prepare a trading plan.

Prepare a trading plan, with historical data and then stick to it. Don’t keep fine tuning the plan, it means never change plan. Start with the smallest amount of capital that you can effectively trade with. Initially start with a small amount and carefully enter the stock market.

4. Make a commitment

Don’t get overexcited after a few successes in stock market and start increasing your capital, that is a sure sign that you are not in control; the market is controlling you which mean you are on the path of getting trapped in the stock market.

5. Take a break

No matter you are gaining or losing money in stock market. You should take a break after fix intervals let’s say after 4 months, pause for a 3-4 days. Again evaluate your performance and identify any gaps in your knowledge that needs additional works.

6. Take Professional Help

If you know there is a problem in your trading plan, don’t hesitate to consult a financial analyst. Find an experienced and performance oriented professional who is providing tips to their clients. Take advantage of their research and knowledge.