A beginners guide and tips for Stock market investment and trading in derivatives-Future and Options
If you consider stock market a place where you can make quick money by taking ill calculated risks and considering it a poker game, you will lose all your money.
Yes mark these words, I have experienced and from my experience I can say its a serious business and if you are planning to start your career in stock market or want to invest in equities, treat it as a full time profession, I mean it needs as much attention as any other money making job.
What is a Stock Market and which are top stock markets in India?
Stock/share market is a place where companies can list their shares, buyer and sellers can trade in them. In India 2 major stock exchange are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).
What is a share(equity) and by purchasing shares on stock markets make you owner of company?
Ownership of a company is divided into different units/part, each unit is generally called a share. Shares of company are also called equity.
Owning a share is equivalent to owning a part of company. Holding 10% shares makes you eligible for 10% share in profits and assets of company.
Can you trade or invest in stock market and what is eligibility to trade in Stock Markets?
Anyone can trade in stock markets, there is no eligibility required to invest or trade in stock markets. However developing skill to catch correct opportunity to make money in stock markets is must. If you do not want to lose money, learn these skills first.
You need to have a Demat and trading account to trade in Stock Markets.
What is a Demat account and what are the documents required for opening a Demat account?
Demat account is an electronic repository of shares held by you.
Demat account enables you to buy shares online from stock markets. Demat account is nothing but your shares are kept in electronic form in your account and this account is called as Demat account.
You also need to have a trading account to trade shares. By trade I mean buying and selling equities or derivatives for speculation or investment.
I have shares in Physical format, how to convert them to electronic form?
You or someone from your family might have purchased shares long back and these are still kept in paper format and now you need to sell them, first step to do is to convert them into electronic form to sell.
You need to open a Demat account with any of the share broker and submit him the hard copies along with required forms. Your share broker will process these papers and shares will be credit into your Demat account.
If any Dividend was declared or Bonus, split took place, even these will be credited to your account.
A nominal fee may be charged on this.
I have opened Demat and Trading account, now how do I sell and purchase share in stock market?
You must have opened you account with some broking firm. You can trade or invest in shares by offline or online method.
Option 1, is to opt offline method, you need to call your broker and make a purchase.
Second option is to opt for online trading and you can buy or sell shares online using ID and Password provided by you broker.
I will suggest to always opt online trading if you are an active trader. For day trading market gives enough chances to generate a minimum .5% to 1% return. You have to act fast to book this profit. Having online credentials will enable you to execute your trade faster.
Which is the top broking firm in India and where should I open my Demat account?
There are many good brokers in India and you can open account with any of them. Before you open an account, you should consider few factors.
If you are opening Demat account only for Investment and not for trading, I will suggest you to open an account with Banks who provide capital market services also.
Though brokerage is high but you can easily transfer money from your Bank account to trading account and vice-versa.
Though you can choose typical brokers too, if you are concerned about brokerage fee. However as an investor you may not make numerous transactions and perhaps a single investment a month, and you will be investing for long term.
If you are opening demat account for trading and derivatives along with investments, I will suggest you to chose a broker who is not only reputed but also have lowest brokerage fee.
Sometime having low brokerage charges play a major role in winning the stock market. Suppose, you purchase a lot of shares for rs. 1 and after buying you feel that it will not go up further, many people including me have the mentality to not sell shares in loss. However if brokerage is low you can make money by selling this lot at Rs. 1.05 also.
What other factors should I consider before opening a Demat account with a sub-broker?
Mostly you will be opening your account with a stock sub-broker. Sub-brokers take franchise of main broker and execute order on their behalf for customers.
The one very important factor or deciding criteria for any stock market trader should be the trading software. Trading software should be the top priority in your checklist if you are going to be an active trader in stock market.
Factors you should consider while selecting your stock broker are:
- He must be available during trading hours. Many sub-brokers take the franchise but do not devote much time to it. Avoid such brokers, if you need to make a transaction and they are not available at their seat you may end up making a big loss.
- Fast and user friendly trading software is a must condition. Do not be trapped by only low brokerage. The trading software is main tool and only tool your should be relying on while trading during your trading hours. My first big loss in initial days of my trading was due to software. I purchased few shares and could not sell them as at crucial time software automatically logged off and I had to restart software. By the time I restarted the software share was in upper circuit.
To avoid these kind of losses, test the software and do not hesitate to even change your broker from time to time if you feel some other broker has a better solution.
- Brokerage charges should be considered if you are an active trader. Due to human mentality, we restrict our self from booking losses. We consider brokerage charges while calculating profit/loss. A big broking fee mean you delay your decision to execute trade for further points and market can change its mood anytime.
- Knowledge and track record of stock broker maters a lot. I remember couple of years back one stock brokers lost 800 crore in a day due to malfunctioning of its software, the broker is listed in stock market. The error was made by one of its trader, this is the reason I mentioned software one of the factors that should be considered. Past record of broker should also be your top concern.
- Trading using website: Almost all brokers provide the facility to trade using website or mobile. In case you are away from your desktop, you should be able to cut your trades from web browser or mobile. Check whether your broker has it or not.
- Read online review before making any choice. People love to discuss online and you can compare different brokers based on what people are saying.
What are the common mistakes made in stock market by beginners and how you can avoid them?
Common mistakes made by beginners in stock markets are:
- Investing everything into Penny Stocks, penny stocks are the shares trading at very low value. As a beginner I also made this mistake of investing in penny stocks. There are many shares which do not have any solid business but rumors keep them alive.
I was trapped into this in beginning and now after years of learning I do not even check penny stocks neither discuss them.
- Investing based on market rumors than understanding the numbers, this is another mistake you should avoid. Understand the business model of company before investing. Read the balance sheet and most important check cash-flow. Many people do not check cash-flow before investing but this is the most important and easy to understand document that every company has to release.Whether company is really making profits or its only accounting profit, cash-flow will explain it.
- Cash-flow will enable you to understand whether company is surviving on operation generated cash, or money borrowed from banks.
- Speculating more than you can digest, golden rule is invest 80% into equities and speculate with 20%. Do not park more than your risk appetite into speculation trades. During 2008 recession, you must have read a news about few MBA pass outs kidnapping son of their relatives to balance the loss they had from stock markets.
If you cannot digest the loss, do not enter into Future and Options (F&O) trading.
- Investing everything into one stock or one sector, you must observe the market before you start investing or trading. If you watch news, you will understand that on very rare occasion a share perform odd to its industry performance. For example, all real estate shares jump on the same day or all IT stocks jump on same day.In NSE or BSE both you can check the industry wise indexes and shares listed in them. Try to invest in different shares and different sectors.
- Investing all money in one sector sometime is equivalent to investing in one share.
- Relying on TIPS, AVOID IT, AVOID IT, AVOID IT. Its not a typing mistake, I wrote it 3 times purposefully. Avoid tips, whether from news analysts or tips giving agencies. I doubt many brokers share the contact details with companies which provides tips. I keep getting calls from some Indore based firms on stock market tips. Avoid them.Test check it, follow a TV analyst for a week, he will say buy reliance sell TaTa, same analyst next week will say Sell reliance buy Tata.But I will not say that you completely unfollow them, list and understand what they say but act upon your own calculations.
- Some analysts though keep changing their views but its only for short term. Long term views can considered and acted upon and most of the money is also lost in short term or quick trades.
- Not having enough patience is biggest reason that people lose money in stock markets. I remember initially when I started, If I had 20,000 into my account, I will trade with full money as tomorrow there won’t be any stock market!!! Avoid this, every day keep a target and if you achieve this whether early or late in the day, stop trading for day.
Control your greed and emotions. Everyday you cannot make profits, it is wise to book small loss than waiting for market reversal in hope to recover and exit with a profit.
Should you completely rely on TIPS or use your own brain?
I love to discuss this point. I have not seen anyone who made money in stock markets based on TIPS provided by analysts. These so called analysts are opportunists, who play with your emotions and greed to make money.
Have you ever seen any analyst on TV channels explaining loss made on their TIPPED stocks.
Rakesh Jhunjhunwala, the most known Indian investor and trader never gives stock specific ideas, follow him. Listen his each and every word, he is the one you should be following and not these so called analysts.
Use your brain, understand the business of company, read the numbers and then make the decision.
If you do not understand Balance sheet, Profit and Loss statement or Cash-flow then its advised that you read books on this topic or go through online articles. Tikshare has lot of topics on this subject.
When I will be rich!!!
Well, I am not yet rich and its not easy. If stock markets could make you rich in a quarter, there would be no wars, no poverty and everyone would have invested and lived happily.
Its a profession and like every other profession, it has got its learning curve and growth cycle. Warren Buffet started when he was 11, and what he has today is not a result of one quarter, or one year but result of his life time.
You cannot become Warren buffet or Rakesh Jhunjhunwala in a day or month. It is a continuous process and you will learn a new lesson everyday.
Your first trade, think and act!!!
So you opened your Demat account and now you are ready to start invest or trade in stock markets. Before you start transacting, remember the opening line of this post.
Posted 2 months, 1 week ago by Stock Guru
Originally published at www.tikshare.com.