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According to a study published in 2021, Canadians ranked fourth out of 16 countries in adopting stock trading as part of their investment strategy.
But do you know how to trade? It is the first question that would arise in a beginner’s mind. Trade refers to purchasing and bartering the listed securities in the market.
Every company requires funds to carry on business activities continuously. However, arranging the whole amount with the promoter’s investment is impossible. So, securities issues arise in the stock market after completing due obligations.
The investors purchase these securities in exchange for their funds. The price fluctuation of shares helps in earning profit. This is the reason that attracts many people to the stock market.
1. How to Learn to Trade?
Simply put, trading is buying and selling financial securities in the stock market. Many guards are being exchanged in the market. The sole purpose of this exchange process is to earn profit.
However, the profit can be earned in many ways. The most refined methods include getting interest, dividends, or derivations from price fluctuations. A person involved in share trading is a stock trader or stock dealer.
Stock traders can be an investor, speculators, agents, or stockbrokers. It requires calculated moves to be addressed by the investor. Furthermore, the ability to make tough decisions is also essential.
Trading occurs between shares, stocks, bonds, debentures, commodities, and currencies. Let’s go through the information given below.
1.1. Important Trading Related Terms
Stock trading is a broad concept that is limited to shares. Besides, it also includes other financial instruments and other related terms. All these terms are necessary to understand, especially for beginners.
1.1.1. Stock Exchange
A Stock Exchange is a marketplace where listed securities are exchanged. It can be called an aggregation of stocks. The instruments under trade include bonds, shares, and other securities.
Every country has its stock exchanges in which securities are listed. Many companies list their shares on foreign stock exchanges. This attracts foreign investors to invest in their company.
Stock exchange facilitates real-time price discovery of listed securities. The price information helps investors make decisions.
1.1.2. Financial Securities
Security is a common term for stocks, bonds, debentures, etc. Security represents ownership of a company. Each security bears the legal seal of the company.
The seal acts as the indicator that binds the company. These are moveable assets that can be transferred. However, the company issues these securities when it requires funds.
Further, these securities are of three types. Firstly, equity comprises a significant part of the company, which is the owners’ fund that they invest in a company, including standard and preferred stock plus retained earnings.
Secondly, debt includes borrowed funds such as debentures and loan notes; interest is paid to creditors at a pre-decided percentage.
Furthermore, a hybrid security has aspects of partial equity and partial debt.
1.1.3. Equity Securities
Equity securities represent ownership claims on a company’s net assets. The company’s owner invested these funds at the time of its formation. The equity securities mainly consist of Equity shares and Preferential shares.
The equity shareholders are referred to as the real owners of the company. Besides, they also have voting rights in decision-making. During bullish situations, they generally enjoy high returns.
They are entitled to the rest of the profit after satisfying other parties. However, during the winding up of the company, they can claim the remaining assets only. On the other hand, Preference shares are given some advantages over equity shares.
The preferred shareholders are entitled to a fixed dividend rate. Also, during the winding up of the company, their payment is made before equity shareholders. These shareholders do not enjoy voting rights and do not participate in decision-making.
1.1.4. Debt Securities
Debt securities are those financial assets that are subject to loan borrowed. Moreover, these assets define the relationship between a borrower and a lender. Securities include bonds, debentures, and others.
The document acknowledging the debt is known as a debt deed. The debt deed consists of all required information. It includes the loan amount, maturity period, rate of interest, terms and conditions, etc.
Debentures are the most common Debt securities. The company issues these for raising long-term funds. However, debentures have separate legal work than equity. Corporations and governments generally give it a high creditworthiness.
Debentures are of many types, having different terms and conditions. The main types are redeemable, irredeemable, secured, unsecured, bearer, registered, and others.
The depository can be explained as you keep your cash in the Bank to get interest and safeguard it. In the same way, a warehouse holds the shares in your name and protects them.
Also, a depository can be defined as a company for storing securities. These securities are held safely on behalf of the investors. Besides, they also maintain a complete record of securities.
Moreover, this provides liquidity to the market as it can be exchanged for money anytime. Likewise, in India, SEBI is a regulatory body and watchdog. It ensures the fair flow of shares in the market.
In addition to this, it also protects the interest of investors. Also, in the current era, the benefits of a Depository are many. Firstly, it reduces the risk of theft and loss.
Secondly, the burden of physical shares is removed. Furthermore, it can be assessed at any time and anywhere. Previously, the shareholders had to transfer physically, which was quite risky.
1.1.6. Depository Participant (DP)
A Depository Participant is an agent of the concerned depository. Investors and Depositories do not have direct contact. There are Depository Participants who act as an intermediary.
The Depositories Act governs the relationship between Depository Participants and Depositories. A DP can offer related services only after the securities regulatory body’s permission.
1.2. Steps to Start Trading
Following are the generally practiced steps to start trading. While going through each step, you will get detailed knowledge about it.
1.2.1. Selection of Stockbroker
The first and most crucial step is to select a broker. A broker is an agent and financial professional. It acts as an intermediary between the market and the client.
The buying and selling process is done with the help of a stockbroker. Moreover, it is not just limited to an intermediary. A stockbroker can be an individual, a group of individuals, and a company.
They are given a commission for dealing with various clients. Also, they are involved in providing investment advice. The exchange process requires access to any stock exchange.
You must be a member or belong to a member firm for trading. The registered bodies are licensed as share dealers or brokers. A broker is aware of the financial laws and related regulations.
However, they need to be kept updated with financial information. Mainly, brokers are classified into two categories. Firstly, full-time brokers. Secondly, discount brokers.
A discount broker only carries out buying and selling at lower brokerage fees. While a full-time broker generally charges higher brokerage fees. It also provides advice and performs investment analysis.
1.2.2. Opening a Demat Account
To start trading, one must have a Demat account. It is also called a dematerialized account. A Demat account is just like a bank account.
It holds customer’s share certificates and other securities in an electronic format. The dematerialization process makes keeping the share certificates and other securities accessible.
It has reduced the hassling of physical form. Also, it is a protective instrument against the chances of loss. These losses can be due to fire, theft, and other ways.
This can be understood more easily. Let us assume an example. You purchase shares of a company X. Previously, they were transferred physically. But, after dematerialization, they are transferred electronically to the customer’s Demat account.
The depository participants open Demat Accounts. These participants can be a firm, individual, or a group. However, the participants need to be registered with any recognized depository.
To open a Demat account, you are required to submit some documents. Firstly, a proof of identity to recognize the actual owner. You can use valid documents like a driving license, passport, etc.
Secondly, an address proof. Also, in this section, the same document used for identity can be used. In addition, Income proof is recognized by the government. Furthermore, bank account details. Lastly, some photographs.
1.2.3. Basics for Beginners
If you are a beginner, you must start from the very beginning. Understanding the market is very important. In the stock market, there is nothing like hook and crook.
Commonly, there are two major markets where securities are traded. Firstly, a primary need. A primary market is a place where new securities are exchanged—secondly, a secondary market.
A secondary market is a place where previously issued securities are exchanged. In another way, we can say that those traded securities are given in the primary market.
The price fluctuation can be determined, but not exactly. There is always a possibility. The forecasting can be done on news-based, technical analysis, and others. However, always planning is necessary before investing your money.
Market screening is the very first thing before trading. As we know, the share market has many uncertainties. There is no surety of consistently earning profit. Still, people undertake risks to make a profit.
Taking an expert’s advice can help beginners. These experts cannot predict the future but can suggest the best. This is all done based on market screening and experience.
The capital loss in the beginning can bring your morale down. It is always advised to start with safer stocks. This may provide a slow start, but it is good to survive in the market.
1.2.4. Trading Styles and Strategies
Learning trading is not as easy as you think. It isn’t easy to know how to learn to trade and notably from whom.
But you can start by understanding the most common strategies. Active trading is an act of trading in securities to make quick profits in short-term price fluctuation.
The traders may buy and sell bonds, stocks, commodities, and currencies to drive quick returns. This trading style is contrary to passive trading. In passive trading, stocks are held for the long term to derive huge profits.
Besides, there are some common strategies used by the trades to earn from the market. Firstly, scalping is a market strategy to profit through small price movements. In this strategy, the holding period is minimal.
It ranges from seconds to minutes. The scalping technique requires discipline and quick decision-making ability. Also, they have to give due consideration to the transaction fees.
There are some drawbacks to this strategy. Sometimes, the commission cost and low potential profit can affect the trading. Secondly, day trading is also short-term trading. In this, the securities are traded within the same trading day.
The day traders try to derive profit from price change till the closing of the trading day. This trading technique is quite famous among the general public. Moreover, day traders also work for the financial institutions engaged in the stock market.
If executed properly, day trading has a high potential for making profits. However, one can suffer a significant loss in day trading due to a lack of market understanding. Also, it can lead to failure if securities are held for too long.
In addition to this, swing trading is a short-term market strategy. It includes holding securities for a period ranging from days to a few months. This market strategy involves short-term gains from price movements.
The securities are bought at lower prices and sold at higher prices. These kinds of traders have to be emotionally intense to avoid sudden decisions. Moreover, it requires risk management skills.
Also, a hawk-eye on the market trends and news. Besides, there can also be some consequences of this strategy. It requires time commitment and trend monitoring.
Furthermore, position trading is a kind of market strategy in which securities are held for a long time. The period may range from months to several years. The prime motive of this type of trading is to earn huge from significant trends.
This technique requires less experience than the above ones. However, traders allocate some part of their funds to this technique. Technical analysis can be used to determine the correct trend and entry-exit point.
Also, this technique is less experienced because it reduces investors’ liquidity. This hinders the investors from looking at other trends.
1.2.5. Price Fluctuation Indicator
The Rate of Change (ROC) indicator is a technical indicator. It measures the fluctuation of percentage change in the current price relative to the previous price. The hand moves positively and negatively from zero.
It moves upside down when the fluctuation is positive. At the same time, it moves downside when change is negative. This indicator also has a limitation. This indicator’s calculation gives the same weightage as the recent and previous prices.
1.2.6. Understanding of Bullish and Bearish Situations
The first thing to know in trading is to understand bulls and bears. The market cycle operates from two situations, i.e., a Bearish situation and a Bullish situation.
These works are derived from the financial terms bear and bull. It is difficult to predict when a bullish market will turn into a bear market.
A bullish situation is one in which prices of securities are rising. Investors profit considerably in these situations, and the conditions are favorable. This leads to a rise in the optimum value of the assets.
On the other hand, the bearish situation is contrary to the bullish case. In bearish conditions, there is a downfall in the price of securities. It leads to the loss for investors. Moreover, they hesitate to invest during this cycle.
2. In The End
Trading is a broad concept not just limited to buying and selling. It is hard and riskier. Anyone can start trading with a Demat and trading account. But where to start and when to start is a question.
If you are a beginner, you must learn how to trade first. Learn what it is. How does it work? What is required? Starting trading will undoubtedly be challenging without a clear answer to these questions.
This market’s risk factor is relatively high, which needs to be correctly analyzed. Moreover, beginners should take advice and consult with experts before investing in stocks. These experts do forecasting on behalf of market trends and past experiences.
Market screening, fundamental trends, and news are the market analysis sources. One must monitor these factors and commit time to doing healthy trading.