Congratulations! You just proved that you are different than most people.
Millions of individuals dream to be successful investors someday and build a powerful empire by investing their money in the stock market. But their dream remains a dream until they draw their last breath. Because they lack the conviction, willpower, and discipline to align themselves towards their goals and turn them into reality.
The fact that you took the trouble to try and learn about the basics of stock market all by yourself proves that you are different, you have the right mindset. It means that you are willing to work for your dreams and we are here to help you make that happen.
Through this article, we have tried to explain the basics of the stock market in simple words so that anyone can understand its function. We have also provided 6 useful tips for you to keep in mind throughout your journey in the stock market.
What is a Stock Market?
A Stock market is essentially a platform for traders and investors to buy and sell shares. The entire setup is collectively known as the stock market. Now the setup consists of the NSE, BSE, depositories like NSDL, CDSL, and brokers.
But explaining the entire setup of the stock market is a tedious task and far beyond the scope of this article, but still, we would like to give you an idea about the structure and the function of the stock market through an example.
Let’s assume that you have to buy some cookies and there are some bakers in your city that are willing to sell those cookies. Now a regular market is a place that provides the baker and consumers like you a platform to make that trade happen.
Now many bakeries in the market sell cookies and you decide your favorable bakery based on attributes like pricing, location, taste, etc.
Think of stocks as cookies and the market you need to visit to buy these stock cookies is the Stock Market. And remember, you can choose from a lot of different bakeries. Well, the bakeries, in this case, are NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). NSE and BSE are the different stock bakeries you can choose to buy your stock cookies from in the stock market.
To understand the role of the brokers in this entire architecture, you need to understand two things first. The first is a share and stocks and the second is a Demat account. These are some of the most important basics of stock market.
Shares, Stock, and a Demat Account
A share of a company represents a fraction of the company’s ownership against the total number of outstanding shares. Suppose there are 100 shares of a particular company and you own 1 share. It means that you own 1% of the company. All the outstanding shares of a company put together are known as stock.
Back in the day shares used to be materialized, meaning that they used to be a document that you could carry home and store in your vault. But as technology advanced and the processing power of the computer was recognized, everything transitioned into a digital format for the sake of convenience.
All the shares that you buy or sell in the stock market today are now digital or dematerialized. In fact, the entire process is now digital. So to store these digital shares, you need a digital vault.
Demat accounts are digital lockers and you can open Demat accounts through brokers and start buying and selling shares.
I hope you understand the role of brokers in this entire setup.
Opening a Demat account has become a really simple task thanks to the new generation of brokers. You can open a Demat account in less than 30 minutes from your home as the process is entirely digital. You just need to upload the required documents and wait for them to get verified. Once the verification is successful, you can start buying and selling shares in the stock market.
As a beginner, you can also read books on the stock market. Reading good books is a fantastic way to learn about the stock market. You can check out our article on Best Books on the Stock market for beginners if you like.
Now that you are somewhat familiar with the basics of stock market and have captured some of its concepts.
Here are 6 tips for you as a beginner investor, so that you can avoid making the most common mistakes in the stock market.
6 Tips for Beginner Investors
As a beginner, you might make a lot of mistakes and lose a big chunk of your capital in your initial days, and lose interest in investing altogether. To minimize this risk here are 6 tips that will help you make better decisions in the stock market.
1. Trading or Investing- Pick Your Side
Trading and Investing are two completely different strategies in the stock market. While trading refers to buying and then selling the shares within a short period of time ranging from a few hours to a few days. On the other hand, investing refers to buying a share and holding it for long periods of time ranging from a few months to several years.
Good investments span over several decades sometimes. So as a beginner you must choose whether you want to be a trader or an investor. Trading requires regular monitoring of trades, commitment, and high discipline to churn out profit from your trades. While investing, you buy shares of a company that you believe in and hold them for long periods of time.
You should be inclined towards investing as a beginner. Because trading requires a certain amount of knowledge and experience that beginners lack. Therefore, beginners should choose quality companies with good fundamentals and invest in them, while garnering the experience to take short-term trades in the process.
2. Do Not Trade or Invest in Stocks Based on Tips
This is the most important tip of all. Never buy a stock just because you heard about it from someone, or because someone made a huge amount of money from that stock, or someone told you to buy it.
Always do your research and make sure that you see the value in that particular stock and a clear reason why this stock would go up in the future. Unless you can identify these parameters in any particular stock, stay away from the stock.
Buying a stock based on a tip or advice defeats the purpose of investing. Because as a beginner the most important thing for you is the knowledge that you get out of that process, not the money. And a majority of these tips will lead you to losses unless the tips are from a certified financial advisor.
3. Know Your Basics
To get started you don’t need to learn everything that comes under the basics of stock market. You just need a thorough knowledge of the different types of orders that can be placed in the stock market and the different taxes and charges that are levied on your transactions.
Because everyone does not have the time to regularly monitor the markets during market hours and to compensate for the lack of time you need to have some other resource that can fill the gap.
All the different types of orders including MIS orders, bracket orders, limit orders, stop-loss orders are powerful tools that can compensate for the lack of time and will help you capture trades that would have been impossible to catch otherwise.
And a proper grasp of all the taxes and charges will allow you to be smart financially and maximize your profits in the stock market. Beginners lose a lot of money to the hidden charges levied by the brokers.
Therefore, a proper understanding of all the different types of orders and awareness of the charges and taxes will give you an edge over others.
4. Avoid Margin and Leverage
Lack of capital is one of the biggest issues for traders in the stock market. To solve this issue, brokers offer margin trades that allow the individual to buy worth more than they have.
In margin trades, you pay a certain amount of margin based on the margin requirements to the broker. And the broker allows you to buy shares worth a certain multiple of the margin. This multiple is called leverage.
Let’s use an example to understand this.
Suppose you pay $20,000 as margin to the broker and the broker gives you a leverage of 5X. That means that you can buy shares worth $100,000 in the stock market without actually having $100,000. But beginners might find margin trading a little intimidating as the risks involved are really high.
Although it might seem intriguing at first sight, the amount of risk involved is a force to be reckoned with.
5. Invest your own money
One of the biggest mistakes that one makes as a beginner is that they borrow money from their friends, or family to invest in the stock market. Avoid doing this at any cost. Borrowing money to invest in something as risky as a stock market is like digging your own grave.
The mental pressure that accompanies investing borrowed money can only be handled by veteran fund managers with decades of experience in this field. So it is a good idea to invest your own money in the stock market no matter how small the amount is.
It’s better to lose your own money in your initial days than somebody else’s. And always be prepared for losses and failures as a beginner, as they are part of your learnings.
6. Know Your Risk Appetite
As a trader or an investor, the downside of your trades should always be limited. You should be fully aware of the amount of risk you can take with the amount of capital you have. Risk assessment is one of the major tools that can help you make some money from the stock market.
Diversify your portfolio based on the amount of risk you can take. Also, prepare backup plans to limit your losses in case the price movement is not in the expected direction.
Risk assessment and risk management are golden assets for any trader or investor as it helps them preserve their capital and keep on investing.
We hope that this article on Basics of Stock Market helped you in some way and we would love to answer your queries in the comments below!