The stock market might sound like a confusing method to make money to beginners. And top of that the financial news fans the flame with bemusing buzzwords stating value and earnings, and tales from the floor of the stock market. All these things don’t mean anything to a beginner. But those people, who are looking to do good in the stock market and want to understand and apply these concepts to improve their trading skills, know the value of all these buzzwords.
When it comes to trading and investing in the stock market, most people hesitate because of various reasons. Some leave it in between because they think the stock market is a get rich quick scheme. If you are one of those who do not hesitate to try something new and keep yourself away from the thought of getting rich quickly, then you will definitely perform well.
Now you have decided to dive into the world of stocks, the first thing you will search for is “Basic of the stock market for beginners”. There are tons of posts, tips and tricks are available on the internet, but you need to choose a reliable source. Here are some time-proven, reliable tips that will help you to become a successful investor/trader.
Before understanding the stock market trading methods, let’s just have a quick overview of the stock market.
What is the Stock Market and How it Works?
What is the Stock Market?
The stock market is like other markets, but the main difference is, in stock market buying and selling of stocks occurs instead of other products. The stocks or shares are sold and purchased by individual and institutional investors.
In this modern era, this process is administered electronically by leading stock indices like Nifty, DAX 30, FTSE 100 and NASDAQ 100. Every one of these shows the performance of a basket of stocks. An authority keeps an eye on these stocks as a large quantity of single stock can influence the index.
What are Stocks?
Stocks or shares are a kind of ownership certificate of a particular company. A business or company issues these shares or stocks to raise funds for its growth. Also, these shares fluctuate in price, which depends on the performance of the business. Stocks can be listed to both public stock markets and private investors. The stocks available for private investors are known as over the counter stocks or OTC stocks.
The price of stocks fluctuates depending on various factors such as a new CEO appointment, new product launching, earning announcement and many more. Shares also show your ownership in the company; for instance, if you have 10,000 stocks of a company worth 1 million, it means you have a 5% ownership stake in the company.
How Stocks are Traded
When it comes to stocks, there is an essential division between trading and investing.
A trader makes or loses money by guessing on securities in a short period of time. Most of the time, the traders focus on various technical patterns and indicators using different methods like day trading and scalping. And also sometimes uses a ten minutes chart for short time frames.
With various online trading platforms, the traders monitor the performance of shares along with the entry and exit values.
An investor makes or loses money by purchasing a stock and holding it in its brokerage account for a longer timeframe. In this time, the investor looks over to get dividends and interest, as well as earns profit from the peak value of the stock that increased because of the longer time frame.
This “buy and hold” approach involves the holding of a share for a minimum period of five years. Investors focus on total return which includes capital gains, interest, distributions, dividends. All these things are taken into account while evaluating the total return of an individual share.
How to Start Trading Stocks?
The first step towards trading starts from deciding whether you want to trade or invest. Differences between these two terms are explained above. After this, there is a need to make a checklist before starting trading or investing.
- Make your trading goals
- Understand the basics of trading
- Choose the right broker
- Research key companies
- Making a diversified portfolio
- Practise risk management
Understand the Basics of Trading
The foremost thing to start trading or investing is that you need to understand the basics of the stock market. Get the basic idea of an index, stocks, timings of the stock market, how the market moves, stockbrokers etc. get a general idea of all these terminologies.
Most of the beginners skip this primary and most important step hence, leads towards loses. Because if you do not know the basics, then it will not be possible for you to make your own investing or trading strategies. Just spend a few days learning these basics, and once you will, you will start feeling confident about trading/investing.
Various quality brokers provide educational material for beginners without charging a penny. One of them is ETFinance. ETFinance is a reliable broker which provides its clients commission-free trading with a minimum deposit. The broker serves its clients with diverse financial instruments and commission-free trading.
Selection of a Right Broker
When you are pretty convinced that you want to trade or invest, now it’s time to choose the right broker which provides you with low commission and helps you to make more profits. Now, it is very easy to open an account with any broker but just make sure it is reliable. You can set up your account only with an ID proof and funds to invest or trade. If you are not aware of any reliable broker, then take this.
Top Trading Platform for Stock Trading: Read More
How to Identify the Right Shares to Trade?
When it comes to identifying and picking the right shares, it is vital to go for companies that you are familiar with. Consider all the factors that help you to determine the value of a stock.
- The financial health of the company: To know the financial health of a company takes a look at the balance sheet of the company. How is the company making profits and revenue? What is the growth rate of the company? How much loan or debt does it have? Try to get answers to all these questions to determine the financial health of the company.
- Innovation levels: How does the company expand itself? What new products it is going to launch in the market? Is the company working on an expansion plan or not? How does it address new market demands? How does it deal with its rivals when it comes to satisfying customer needs?
- Dividends: How often is a company dividend paid? Is the company paying a dividend? If paying dividends, then are they increasing it?
- Price and valuation: Is the company undervalued? A price to earnings ratio or P/E is used to get a clear picture of price and valuation of the company. P/E ratio is used to identify that the company is overvalued or undervalued. It is calculated by dividing the company’s current stock price by the company’s earnings per share.
- Liquidity: Liquidity of a company shows that the shares have enough trading volume so that the traders can easily enter and exit from the market. Some examples of liquid stocks are Alibaba, General Electric etc.
- Volatility: Volatility shows the extreme potential of stock for notable price fluctuation. Picking a volatile share could be risky, but on the other hand, it can also provide good opportunities for you.
Another contemplation is how the share will fit in a portfolio. For instance, a strategy or approach will work purely to add greater security with defensive stocks or dividend stock or capital gains with growth stocks.
Things to Remember Before Trading Stocks
Before diving into the world of the stock market there is a need to get a clear picture of some points such as, the investors and traders should have a clear idea of their goals, what is the risk-taking capacity, how much money they can risk and understanding of trading style and how to diversify the portfolio.
What are the Goals?
The goals which derive the decision are the most essential to understand. It is imperative to understand what is the time limit of cash being tied up? What are your other plans for the money? Do you need the money in the coming few years if you are keeping it for a longer time?
For example, If you are saving money for your retirement, then investing in stocks is the best choice for you because it is for a longer time frame. But if you are saving it for something that you want to purchase next year or in the coming five years, then you should focus on Stock trading over stock investing. Because stock trading takes place in a shorter timeframe, or you can consider choosing another asset.
How Much Money will be Risked?
A prudent market practitioner always sets a limit for himself that he can risk. A beginner or an experienced trader both should think about the money that is available to invest or trade. A safe and advisable amount that can be risked might be 5% of the total annual earning. When it comes to risk, good preparation for the uncertain market fluctuations plays a significant role. And this knowledge comes from the years of experience acquired from various companies and industries.
If you want to minimise the risk, then prefer to invest in mutual funds. They also invest in shares, but the decision is made by market experts which minimises the risk of losing money.
Keep Emotions Aside
Managing emotions while trading is of paramount importance. While trading shares, there will always be tons of market information about the investment, but most of it would be useful. An investor or trader should be capable of filtering out the speculations, rumours, noise and also avoid the fear of missing out to influence their stock trading decisions.
It is essential to control the emotions and stay determined to the initial reasons for why you choose the shares. In a heap of stocks, there will be times when some of them will not perform to the expectations. You need to learn to deal with these losses that are the key to ultimate success.
Is the Portfolio Diversified?
A diversified portfolio means holding or trading the variety of stock of various companies, in numerous sectors, to hedge against unfavourable conditions. Other assets that can make your portfolio diversified are forex, bonds, commodities etc.
In The End
The world of the share market is risky and complicated. But if you have decided to enter it and you are able to start right then, you will make a path for yourself which is full of profits and success. Keep one thing in mind that there is no easy and no quick money in the share market. Share market requires a lot of discipline, dedication, commitment, knowledge and time.
If you have all these qualities within you or you are able to develop them within you over time, then the market will bring great returns for you that you can’t even imagine.