Are you ready to start trading stocks but are unsure of the first steps to take? If yes, then you’re in just the right place.
The stock market is a path that can potentially lead you to gain immense profits. However, the peril of volatility is omnipresent along this path as well. As a trader or investor, you can witness both ups and downs throughout this emotional journey.
In proper investing terms, most stock people fall into one of two categories – traders or investors, depending on the frequency with which they buy and sell stocks. Traders go for short-term investments, holding the shares for a few months, weeks, or days. On the other hand, investors go for long-term investments. They buy at regular intervals and sell much less frequently, or not at all.
Unlike what many people tend to think, you don’t need to be in a world-class stock exchange for trading stocks. You can readily get started from the comfort of your home as well.
For your benefit, I have put together this comprehensive guide to stock trading. Let’s begin by briefly understanding what exactly this phenomenon is.
What is stock trading all about?
Like I mentioned above, stock trading is a form of investing that focuses on short-term profits instead of long-term gains. Stock traders buy and sell stocks to capitalize on price fluctuations that take place every day. These traders are betting that they can make some money in the next few minutes, hours, days, or months. Unlike investors, they don’t buy stocks in a blue-chip company to hold for years or even decades.
Stock trading is of two main types:
This is for investors who place ten or more trades every month. They generally employ a strategy that is highly contingent on the timing of the market. As a result, they try to take advantage of short-term events, either based on market fluctuations or at the company’s level, to gain a profit shortly.
This strategy is for investors who deal more actively and riskily with stocks. They buy, sell, and close their positions 1 1. Here, “position” refers to the amount of a specific stock or fund owned by the trader. × of the same stock in just a single trading day, without paying much attention to the inner workings of the associated businesses. Day traders aim to earn some money in the next few minutes, hours, or days based on daily price fluctuations.
Now that we’ve had an overview of stock trading let’s understand how to go about it.
How to start trading stocks in India?
Before you begin, make sure to read this beginner’s guide on how to invest in Stock Market (Opens in New Tab).
Suppose you are about to venture into the world of stock trading for the first time. In that case, there’s an important fact you need to remember – to achieve optimal performance in the long term, investors need to keep things simple and invest in a diverse mix of low-cost index funds. The logistics of trading stocks comes down to a handful of steps, which I have described in detail below.
1. Open a trading account
It doesn’t matter whether you keep doing dummy trading or playing stock market games – you won’t get the feel of actual market risk until you commit your own hard-earned money. But, of course, you shouldn’t put all your savings into stocks. Instead, begin with a small corpus and try to learn how the market works. To get started, you must open up a trading or brokerage account first – a particular kind of account that can hold investments.
For trading stocks, you need an online broker – each of whom offers something unique. For example, some brokers provide outstanding research, while others are known for their excellent trading platforms and tools. Finally, some offer a minimal barebones experience but are easy to use. Examples of online brokers include Zerodha, Upstox, TradeStation, TD Ameritrade, Fidelity, and much more. After choosing a broker, have a conversation with them, do the KYC, and fill up the required forms.
You are now all set to begin trading in stocks. You will benefit by getting comfortable with app-based trading and online trading because they allow you to have a lot of freedom and control. Anyway, it’s time to prepare for your very first trade.
2. Learn as much as you can about trading stocks
Since you are about to put your hard-earned savings into stocks, you should know what you’re doing. Books and articles on stock trading, such as How to Make Money in Stocks by William O’Neil and Investopedia.com, are rich educational sources for stock trading.
You should also try to find a mentor (like I found Sanu Siddharth) to learn with. This mentor can be anyone such as an experienced friend, family member, co-worker, or anyone with a fundamental understanding of the stock market.
Furthermore, you could learn about great investors from the past to receive inspiration, perspective, and appreciation for the stock market. Such legends include Warren Buffett, George Soros, Peter Lynch, Jesse Livermore, Paul Tudor Jones, and many more. Finally, try to follow the stock market closely and regularly.
News websites like MarketWatch and CNBC are great resources for beginners, while Bloomberg and the Wall Street journal offer detailed coverage.
You can also consider going for paid subscriptions and online classes or seminars to prepare yourself better. First, however, make sure you watch out for scams and frauds rampant in this regard.
Here are the books that Warren Buffett recommends.
3. Set a stock trading budget
Even if you are well-prepared and discover that you have a real knack for trading stocks, I don’t advise allocating more than 10% of your portfolio to individual stocks. Doing so can potentially expose your savings to a whole lot of volatility. You can reduce that 10% even further if you don’t have an adequate emergency fund and 10 to 15% of your income is going into a retirement savings account.
You must never forget to invest only the amount of money you can afford to lose. Never use the money you intend to use for near-term, unavoidable expenses like tuition fees or a down payment.
4. Learn to use limit orders and market orders
After you are sufficiently prepared and have your brokerage account and budget ready, you can place your stock trades using your trading platform or online broker’s website. You will then receive numerous options for order types, which determine how your trade goes through. Although there are quite a few order types available presently, I have covered two commonly encountered types below:
- Limit orders – These buy or sell the stock only at or better than a particular price you set. For a buy order, the limit price will be the maximum you are ready to pay. The order will go through only if the stock’s price is equal to or below that amount.
- Market orders – These buy or sell the stock promptly at the best available price.
5. Practice with a virtual trading account
Don’t worry if the thought of trading stocks with your valued savings is proving to be too problematic. You can gain a lot of confidence by going for a hands-on, low-pressure experience using the virtual trading tools offered by several online stock brokers.
For example, both TD Ameritrade and E*TRADE offer virtual trading to help you practice buying and selling stocks. It allows you to test your trading acumen and build up a track record before putting real money on the line.
6. Buy your first shares of stock
Using your online broker account setup, you can now proceed to take the plunge and finally place your first stock trade. Again, don’t hesitate to start out small – even one, 10, or 20 shares will do the job just fine.
However, many new investors make the mistake of buying too many shares for their first stock trade. Remember that as a beginner, you must avoid the temptation to take too much risk. Instead, try to begin with trading small position sizes and then gradually work your way up to buying more shares, on average, each trade.
7. Take small but informed positions in stocks
That sounds quite simple, doesn’t it? However, newcomers often inquire about taking informed positions when they don’t even understand anything about the stock market. I’ll make this clearer – every person tends to specialize in some particular industry or discipline they work in. Which are the companies in that industry that happen to be doing the best at present?
Since you are familiar with this industry, try to find out which of these companies will likely be around after ten years or so. You can then go ahead and start buying these companies. Also, you needn’t worry too much about ROE, P/E ratios, and other similar details at this point. You can efficiently deal with them at a later stage.
8. Get well-acquainted with the complete order flow
You must remember that trading is as much about the process itself as it is about buying quality stocks in the market. After you place the order, head over to the order book and then to the trade book and verify. Try to understand when you should put a limit order and when it’s better to place a market order. Observe the best bid and best ask prices, and make decisions about profit target and stop-loss.
After you are familiar with the process, including DP credit and funding your trading account, you can begin to read up investment notes, online articles, and so on. Also, ignore advice regarding short-term profits. It might sound appealing, but it will only put you at risk in the long run. Instead, you will receive profits if you correctly understand the process and buy good stocks at present.
9. Book profits and take more considerable risks with profits
This is a slightly more complicated but necessary step. You earn profits when you sell, not when you buy. So you should try to book your profit as soon as you get it. Trust me, one of the best experiences of being a beginner is seeing your money grow. After this, you must proceed to classify risk. Take the usual risk with your capital, but get a bit bolder and take slightly higher risks with your profit. Keep a vigilant eye out for ideas of companies and products that seem to be doing something unique and exciting.
10. Learn how to review trades
As a beginner, this is the last step you’ll have to carry out. First, you must learn how to read the ledger account and Demat statement and ask your mentor or broker relevant questions. Then, every week, try to determine whether you are running in an overall profit or loss. Finally, make efforts to keep a strict limit to the capital you can afford to lose. These are seemingly small but highly effective risk management measures that will significantly help you in your trading ventures.
Your ultimate goal for picking stocks is to stay ahead of a particular benchmark index. That could be the Nasdaq composite index (for people investing mainly in technology stocks), the Standard & Poor’s 500 index (generally used as a proxy for “the market”), or other tinier indexes that are comprised of companies based on geography, industry, and size.
It is imperative to measure results; often, even professional investors are unable to outperform the benchmark. In that case, it is financially sensible to invest in a low-cost index mutual fund or ETF. That is essentially a basket of stocks whose performance is closely along with one of the benchmark indexes.
In this article, I covered all the essentials of trading stocks that beginners need to know. You must always bear in mind that investing isn’t a short-term venture but a lifelong game. It is unwise and foolhardy to rush into the stock market and invest your hard-earned savings without thinking carefully. Instead, you must learn how to be patient and prudent.
Begin with a small amount to invest, keep it simple, and gain experience from every trade you make. If you cannot control your emotions when trading, you should consider passively investing in the overall market with a simple index fund. Either way, this very patience and thoughtfulness will get you a long way along the path of success in the world of stock trading.