How to Learn Stock Market Trading?

One can learn stock market trading by starting with basic financial concepts and practising trading through a virtual account, which allows for simulated trades. In this article lets understand about the basic concepts of stock market trading and what are types and instruments to trade in the market.

Key Highlights:

• Trading can be done by building the basic foundational knowledge on markets.
• Markets can be understand more by practising more on virtual trades without risk.
• One can able to improve trading by develop technical skills

What Are Stocks?

With stocks, you buy ownership in a company. By purchasing stock, even a single share, you become a shareholder. You can expect to benefit from the company's profits through its capital appreciation, dividends and other loyalty rewards that the shareholders receive. Stocks vary by type, categorised based on criteria such as,

Market Capitalisation:

Companies are categorised based on their market caps, such as
1) Large-cap (top 100 companies)
2) mid-cap (top 101 – 250 companies)
3) small-cap. (companies from the top 251 and beyond)

Ownership:

Once you purchase shares (even one share), you become a shareholder of the company. You will be eligible for corporate actions and will have voting rights depending on the shares you hold.

The most common types of shares are

1)      Common shares (have voting rights)
2)      ESOP (employee stock option preference)
3)      Preferred shares (have no voting rights)

Strong Fundamental Stocks:

Companies that have demonstrated strong performance over the past years are referred to as fundamentally strong stocks. These stocks are well known as highly stable stocks capable of generating consistent returns over time.

High Volatility Stocks:

Stocks with a high daily trading volume are called high-volatility stocks. Their price fluctuations during trading hours are highly volatile, which provides high liquidity to investors and traders in the market.

High Dividend Stocks:

Stocks with a high dividend yield are called high-dividend stocks. A high dividend yield percentage indicates that a stock pays a dividend compared to its CMP.

What Is a Stock Market?

The terms "stock market" and "share market" are often used interchangeably, but there’s a subtle difference. A share market refers specifically to trading shares, while a stock market encompasses a broader range of financial instruments, including bonds, mutual funds, derivatives and other tradable financial instruments.

Both platforms feature an exchange where buyers and sellers trade ownership stakes in companies.

How Does the Stock Market Work?

Funds are raised by selling existing or new shares by a company to the public, private investors, and venture capitalists through a stock exchange like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). This process usually starts with Initial Public Offerings (IPO) directed to the primary market.

As investors buy these shares, companies grow, which increases the value of shares, resulting in capital gains. In addition to this, some companies pay dividends, which are the profits given out to shareholders.

The shares are later exchanged in the secondary market, where investors trade shares with each other through brokers without regard to the issuing company.

Stock prices are determined by the supply and demand for them due to various factors, including economic reports, the company's productivity, the current market situation, and the mood of the traders. The stock market has historically averaged an annual return of approximately 10%, indicating its potential for wealth creation.

Why Companies Use the Stock Market

For capital funding, these firms appeal to the general public through stock companies, where you and I purchase their shares. In doing so, investors gain a claim to part of the firm's wealth and share in its dividends, enabling them to gain wealth through the capital market.

In many instances, businesses incur and pay debts with capital supplied below the required figures. While the earnings obtained from selling goods or services may suffice for some, many will need additional assistance to cover working capital requirements or to facilitate growth.

Key Stock Market Terms Used by the Traders & Investors

• Sensex: BSE’s Benchmark Index representing the top 30 stocks on the BSE by free-float market capitalisation.
• Nifty 50: India’s Benchmark Index represents the top 50 companies on the NSE by free-float market capitalisation.
• SEBI: Securities and Exchange Board of India, the market regulator in India.
• Demat Account: An electronic form of account to hold securities.
• Stock Index: A measure of market performance (e.g., Sensex, Nifty).
• Bull Market: Rising economy and stock prices.
• Bear Market: Economic slowdown and declining prices.
• Bid Price: The highest price a buyer offers for a stock.
• Ask Price: The lowest price a seller is willing to sell.
• Dividend: Profit shared with shareholders.
• Equity: Value of a shareholder’s stake after debts are paid.
• IPO: First sale of a company’s shares to the public.
• Moving Average: A technical indicator tool to analyse price trends.
• Call & Put Options: Derivative contracts of underlying assets like stocks and indices.

How to Start Trading Stocks

Trading stocks can be exciting and lucrative, but success requires preparation, knowledge, and discipline. Here’s a beginner-friendly roadmap to get started.

Step 1: Decide Your Trading Style

Before taking any trade decision, determine your trading approach based on your personality, risk tolerance, time commitment, and goals, such as,

Day Trading:

• Buying and selling stocks or derivatives within a single day results in high risk & high reward.

Swing Trading:

• Holding stocks or derivatives (max 3 months) for days to weeks results in moderate risk and moderate reward.

Position Trading (Long-Term):

• Holding for years always resulted in lower risk & higher reward.

Step 2: Open a Demat and Brokerage Account

To trade, you’ll need a Demat account to hold securities electronically and a brokerage account to execute trades. The process is simple:

• Provide personal details (name, address, ID).
• Select an account type (individual, joint, or retirement, like an IRA).
• Fund the account via bank transfer, wire, or check.

Step 3: Research Brokerages and Platforms

Select a brokerage with tools suited to your needs

• Day Traders: Prioritise low latency, real-time data, and advanced charting
• Swing Traders: Look for research tools and mobile apps.
• Long-Term Investors: opt for educational resources. Compare charges, usability, and reputation before committing.

Step 4: Research Stocks

• You can analyse stocks and other financial instruments using the following methods.

Fundamental Analysis:

• Assess a company’s financial health (earnings, debt, growth) for long-term decisions.

Technical Analysis:

• Study price patterns and indicators (e.g., moving averages, RSI) for short-term trades.

News & Sentiment:

• Monitor earnings reports and market events. Diversify across sectors and regions to reduce risk and keep learning through financial media like Bloomberg.

Step 5: Place Your Trade

When you think you are ready for trade, understand all the above-discussed risk factors, execute trades via your brokerage, like,

Market Order:

• A market order is an order where you can place Buy/sell orders at the current market price for speedy and immediate trade execution.

Limit Order:

• A limit order works by setting a specific price for executing an order.

Stop Order:

• A stop loss order is a loss-limiting order where you can trigger a sale to limit losses or lock in profits.

Step 6: Manage Risk

Stop-Loss Orders:

• A stop loss order will automatically exit a trade at a preset loss level.

Position Sizing:

• Limit each trade to 1-2% of your capital present in your trading account.

Risk-Reward Ratio:

• Aim for gains that outweigh your losses (1:2, 1:3).

Diversification:

• Spread your investments in different sectors to mitigate concentration risk.

Emotional Discipline:

• Stick to one trade plan and avoid fear or greed-driven moves to maintain consistency.

Tips for Beginners

Understand Stock Quotes:

• Understand that prices move in response to supply, demand, and market conditions to identify entry/exit points.

Set Stop-Losses:

• Stop loss helps minimise losses in the volatile market and safeguards your capital.

Start Small:

• Test strategies with less capital with low-risk stocks before scaling up.

Seek Advice:

• If you're unsure, experts can guide you through unpredictable market shifts.

Conclusion

Nowadays, learning how to trade in the stock market has become very easy with the help of technology. You can learn trading from the beginning to the pro via online. Understand your trading style, conduct thorough research, implement effective risk management, and trade wisely.