Becoming a stock trader and learning how to trade stocks can be an exciting yet challenging task. Understanding the basics is essential for newbie traders to navigate the market’s intricacies. The share market is a place where buyers and sellers exchange shares or equity. To facilitate the exchange publicly, a formal marketplace called stock markets has been developed for investors to buy and sell their shares securely.
If you’re just beginning your stock market journey, by the end of this blog, you’ll have all the knowledge needed to make your first stock market investment. Let’s dive into it!
What Are Stocks?
Have you ever wondered what stocks are or had issues understanding the difference between stocks, shares, and equity? Don’t worry. Stocks can sound complicated to somebody who has yet to learn about financial markets. Stocks are simply an investment method for building wealth.
Firstly, you need to know the difference between stock and equity. Stocks and equities are both used to describe units of ownership in a company and are used interchangeably. Stocks are a type of equity representing a single unit of ownership share in a company. Equities can exist in any business where value can be split among owners.
When you invest in a company’s stock, you buy its equity. A stock is a security that represents a small portion of ownership in any company. When you buy a company’s stock, you’re buying a small piece of that company, called a ‘share’.
Investors can purchase stocks in companies they think will go up in value. If that happens, the company’s stock increases in value as well. Buying equity means you own a share in the company that issued the stock. Investment in stocks is a way to invest in some of the most successful companies.
Understanding the stock market
The stock market is simply a platform where stocks are bought and sold. When people refer to the stock market rallying or going down, they generally refer to major market indexes. What is a market index?
A market index tracks the performance of a group of stocks, which can represent the market as a whole or a specific sector of the market, like manufacturing or technology companies. You’ll likely hear the most about stock markets like the Sensex (Stock Exchange Sensitive Index), NIFTY, S&P 500, the Nasdaq, etc.
For instance, the Sensex stock market index reached its highest value of 75,124.28 on 9th April 2024. This implies that the companies listed on the Bombay Stock Exchange cumulatively touched their highest valuation ever on this day. Sensex is an index dedicated to the performance of companies listed on the Bombay Stock Exchange (BSE), and Nifty is dedicated to the National Stock Exchange of India.
Investors use these indexes to track the performance of their portfolios and, in some cases, to strengthen their stock trading decisions.
Types of Markets
Primary and secondary markets are the two major types of markets where stocks are bought and sold. In a primary market, companies issue brand-new securities to offer them to the public for buying. The transaction happens between issuers and buyers.
In the secondary market, you can buy or sell shares released in the primary market. The transaction takes place between the seller and buyer, and the stock exchange or broker acts as an intermediary in this market.
In other words, securities are created in the primary market, while investors trade them in the secondary market. In the primary market, companies sell fresh or new stocks and bonds to the public for the first time by releasing an Initial Public Offering, commonly known as an IPO.
If you need to know what an IPO is, an IPO is the sale of securities to the general public in the primary market. It is one of the largest sources of funds and has long and indefinite maturity for the company. An IPO is the most essential step in a company’s growth. It gives a company access to funds through the public.
Important Stock Market Terms For Beginners
To properly understand the ins and outs of a stock market, you must know these 10 stock market-related terms. These are the most popular ones.
1. Equity: Equity (in the stock market refers to the amount of shares owned by a company. As an investor, you buy an equivalent degree of ownership while buying company shares. The stock market is where these company equity (shares) are bought and sold by one investor to another. The word ‘stock’ is almost synonymous with ‘equity’.
2. Bid: A bid refers to the highest amount of money that a buyer for a stock is willing to pay for a share of that stock. If there are multiple buyers for a stock, a bid between buyers ends when one buyer places a bid that the other buyers cannot or do not wish to match.
3. Ask/Offer: The ask price or offer refers to the lowest amount that the seller of a stock is willing to accept for a share of that stock.
4. Earnings per share (EPS): This is a measure of a company’s profitability, indicating how much profit each outstanding share of common stock has earned.
5. Spread: There is always a difference between the price a seller requests for an object and the price the buyer is willing to pay. This difference is commonly known as the ask-bid spread, and it is primarily determined by demand and supply.
6. Market capitalisation: It is generally considered as the value of a company, calculated by multiplying the current market price of the company’s one share with the total shares of the company.
7. Broker: To trade in stocks, an investor needs an intermediary, known as a broker, to connect to the exchange. Brokers do not own securities but purchase or sell stocks on behalf of an investor in exchange for a small commission.
8. Bull Market / Bear Market: These two terms indicate trends that the stock market is experiencing at a given time. A bull market refers to a period in which the prices of stocks increase, showing that the market is on an upward trend. A bear market refers to a period in which the prices of stocks fall, showing that the market is on a downward trend.
9. Trading account and Demat account: A Demat account is used for holding securities you buy electronically, whereas a trading account helps you place orders in the share market. A demat account is provided by a Depository Participant registered with the Depository.
10. Portfolio: A portfolio is a collection of all an investor’s investments, starting with purchasing a share for the first time.
11. Liquidity: Liquidity means how stocks can be sold off quickly. Shares that get sold consist of high trade volumes rapidly and are called highly liquid.
12. Volatility: Volatility refers to a share’s rate of price fluctuations. A highly volatile stock experiences daily up-and-down movements in its price. Some traders profit from the risks involved in highly volatile stocks, while others prefer investing in less volatile stocks for the long run.
13. Yield: Yield refers to the return on investment (ROI) on stock and is expressed in percentage.
14. Quote: The stock’s latest trading prices contain information generally given in a quote.
15. Exchange: An exchange refers to a place or an electronic market where various securities are traded. i.e. one of the many stock exchanges in the country or worldwide where shares of stocks are bought and sold. The biggest stock exchanges in India are the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE).
With these basic stock trading terms, you, too, can begin your journey into stock market investing. With the considerable potential that the stock market offers, all it takes is some research, some preparation and opening a Demat account and trading account with a reliable brokerage firm like IIFL to start investing.
Bull Markets vs. Bear Markets
Both are animals you’d not want to run into on a hike. However, in general, we’d be more scared of the bear than a bull. A bear will take you down, and a bull will push you upwards. Similarly, a bear market means stock prices are falling, while bull markets imply that stock market prices are rising.
Bull markets are generally followed by bear markets and bear by bull. Both trends often signal the start of more considerable economic changes. In other words, a bull market typically implies that investors are confident. This indicates economic growth. A bear market signals investors are pulling back, suggesting the economy may not do so well.
Investor sentiment plays a crucial role in both bear and bull markets. The collective mood and confidence of investors significantly influence market behaviour. In a bull market, optimism and positive expectations drive stock prices up, while in a bear market, pessimism and fear lead to declining prices.
Stocks Vs. Mutual Funds Vs. Bonds
Stocks and mutual funds represent distinct investment avenues, offering unique features and potential benefits. While stocks signify ownership in individual companies, mutual funds pool funds from multiple investors to invest in a diversified portfolio with assets, including stocks, bonds, and other securities.
Bonds, on the other hand, are debt instruments that companies, governments, or other institutions sell to raise money. Stocks and bonds offer different opportunities for profit and different risks that investors need to be aware of before investing.
Which Stocks Are Good For Beginners?
Beginning your financial journey in the stock market may be exciting and intimidating, especially for beginners. There is a wide range of stocks available for new investors in India. These stocks typically belong to well-established companies known for their market strength and consistent performance.
- Blue chips: are shares of large, financially sound companies with a history of upward and reliable performance. They are typically industry leaders and offer stability when the market is down.
- Dividend stocks: Companies regularly pay dividends are a good choice for beginners. Dividends give you a regular income, which could be reinvested to buy even more stocks. See How to Buy Dividend Stocks to learn more.
- Defensive stocks are from industries that do well even during economic downturns, such as utilities and consumer goods. They will provide you with a buffer against market volatility as you start.
- Growth stocks: Beginners interested in growth stocks should target industries with long-term potential, such as emerging technology or healthcare.
It’s sound to begin with a conservative approach, focusing on stable stocks and a good track record. This way, you can teach confidence and gain returns to trade with as you advance in your investing knowledge.
Developing a Stock Market Trading Strategy
Having a clear trading strategy is essential for success when investing in the stock market. Let’s explore the key to developing a trading strategy, including long-term investing vs. short-term trading, diversification and portfolio management, and common investment strategies.
Long-Term Investing vs Short-Term Trading
Long-Term Investing: Long-term investing involves buying and holding stocks for an extended period, often years or even decades. The main objective is to benefit from companies’ growth potential over time, capital appreciation, and profits.
Short-Term Trading: Short-term trading requires buying and selling stocks within a shorter time frame, ranging from days to months. Traders try to capitalise on short-term market fluctuations and price movements. Intraday trading, or buying and selling a stock on the same day, is a type of this.
Diversification and Portfolio Management
Diversification: Diversification implies spreading investments across asset classes, sectors, and geographies to reduce risk. By holding a mix of stocks, mutual funds, bonds, and other assets, investors can minimise the impact of poor performance in any single investment. Diversification helps ensure that any portfolio is independent of one sector or company.
Portfolio Management: Effective portfolio management involves regularly reviewing and adjusting your investment portfolio to align with your financial goals and risk tolerance. This implies rebalancing your portfolio to maintain your desired asset allocation, assessing the performance of individual investments, and making changes based on market conditions and personal circumstances.
Common Investment Strategies
Value Investing: Value investing is a strategy in which investors look for less valued stocks that are being traded below their intrinsic value. The goal is to buy these stocks at a low price and keep holding them until the market recognises their worth, leading to price appreciation. Value investors focus on companies with strong fundamentals, such as marginal price-to-earnings (P/E) ratios, high dividend yields, and solid balance sheets.
Growth Investing: Growth investing involves targeting companies that exhibit strong potential for above-average growth, often reflected in high revenue and earnings growth rates. Growth investors are willing to pay for stocks, expecting these companies to continue to multiply and deliver significant returns. This strategy often involves investing in sectors like technology and healthcare, where innovation drives growth.
By understanding and implementing these elements into your trading strategy, you can develop a sound approach to investing in the stock market that aligns with your individual goals and risk tolerance. Whether you prefer the stability of long-term investing or the excitement of short-term trading, diversification and the right investment strategies can help you achieve financial success.
How To Invest In Stocks?
The investment process differs based on whether you want to invest in the primary or secondary share market.
Investing In The Primary Share Market
As discussed, primary share market investment is made through an IPO. Once the company receives and considers all applications for the IPO, the shares are allotted to investors based on demand and availability.
Your net banking account makes IPO application simple through Application Supported by Blocked Amount. For example, if you have applied for shares worth ₹2 lakh, then this amount stays blocked in your bank account instead of being sent directly to the company.
If your shares are allotted, the exact amount is removed, and the balance is released. All IPO applications must compulsorily follow this procedure. When shares are allotted, they get listed on the stock exchange (Secondary market), and you can start trading them within a week.
Investing In The Secondary Share Market
In the secondary stock market, stock buying and selling occurs between investors and sellors. You can follow these steps to invest in the secondary share market:
Step 1. Open a Demat and Trading Account.
- Apply online or offline with a brokerage firm.
- Link your banking account.
- Submit the required documents and wait for activation.
Step 2. Log into Your Trading Account and Select Shares to Buy or Sell.
- Use your brokerage-provided credentials to log in.
- Choose the shares you want to trade from the stock exchange listings.
Step 3. Ensure Adequate Funds.
- Confirm your trading account has enough funds, transferring from your bank if needed.
Step 4. Decide the Price and Wait for Order Execution.
- Set a limit order for a specific price or a market order for the current price.
- Wait for a buyer/seller to match your order.
Step 5. Complete the Transaction.
- Buy shares: Pay and receive shares in your Demat account.
- Sell shares: Transfer shares and receive payment in your trading account.
Common Stock Market Investing Mistakes to Avoid
Understanding the complexities of the stock market requires thorough knowledge and a strategic approach. Even seasoned investors can make mistakes that can negatively impact their investment returns. The following are some common mistakes one must avoid.
1. Lack of Research: One of the most common mistakes investors make is to do more research before investing. Stock market advisors emphasise the importance of conducting comprehensive research on a company’s financial health, industry trends, competitive position, and growth prospects.
CTA– Before investing in any stock, Consult a stock market expert advisor or utilise stock market advisory services to get deep insights and make informed investment decisions.
2. Chasing Trends: Investing solely based on recent market trends or popular fads can result in staying caught up, buying at high prices and selling at low prices. Focus on long-term fundamentals rather than short-term trends.
3. Timing the Market: Trying to predict the best times to buy or sell investments sometimes leads to missed opportunities and more trading costs. A more successful strategy is to stay invested for the long term.
4. Ignoring Tax Implications: Neglecting the tax implications of your investment decisions can lead you to unexpected tax bills. Consider tax-efficient investment strategies and account types that align with your goals.
5. Not Having a Plan: As discussed in the blog above, Investing without a clear financial plan can lead to inconsistent decisions and lack of direction. Set specific goals, timelines, and strategies to guide your investment journey.
6. Ignoring Professional Advice: While self-education is important, disregarding professional financial advice when needed can result in missed opportunities or misguided decisions.
7. Succumbing to FOMO (Fear of Missing Out): Rushing into investments due to the FOMO of potential gains can lead to overpaying or investing in assets that don’t align with your risk tolerance or goals.
The Bottom Line!
Stocks are one of the most popular investments to help grow wealth. However, there are certain risks involved. Before investing, along with understanding stock market basics, it is important to consider your investment goals, risk-taking capacity, and investment horizon.
Knowing your investment domain and financial goals before investing in the stock market is crucial. Using advanced tools, expert recommendations, real-time stock market analysis, and data at your disposal as a novice in the stock market is an essential factor in making money in stocks. To avail of these benefits and many more, join us here.
