If you ever have been intrigued by stock markets and shares but are often confused by the big words… This article will give you all the details you need to know before you are ready to trade your own stocks.
It is mainly about the brief introduction to Indian stock market, how to start trading and few basic terms used while trading.
Introduction to stock market:
Stock Market is a place where shares are purchased and sold. Indian stock market is regulated by Securities and Exchange Board of India (SEBI). All the rules and regulations relating to stock market is framed by SEBI. In very simple terms, Stock market is like a vegetable market. The different stalls in the vegetable market are the stock exchanges. There are two major stock exchanges.
- NSE (National Stock Exchange)
- BSE (Bombay Stock Exchange)
At each stall, different types of vegetables are available where one person is seller and the other is buyer. These vegetables are stocks or shares which are sold or bought at the stock exchanges. While at stalls, the vegetables are traded, an exchange is a place in which different investments are traded.
The performance of overall stock market or particular sector is evaluated by INDEX.
INDEX may be defined as a barometer of stock market. It measures the overall movement of stock market. Two major stock market index of India are:
There are other indexes which reflect the performance of a particular sector. For example: Bank Index, Automobile Index, IT index etc.
Examples of Index are: SENSEX, NIFTY, BSE Auto, BANKEX, Bank Nifty, Capital Goods, Consumer Durables, BSE FMCG, BSE Healthcare, BSE IT, BSE Metals, BSE Oil, BSE Mid-cap CNXMidcap.
The Sensex-(or SENSitive INDEX) was introduced by the Bombay Stock Exchange in the year 1978. Therefore, the base year of Sensex is 1978-79 and the base value is 100. It is an indicator of major companies listed on BSE. It is one of the prominent stock market indexes in India. The Sensex is designed to reflect the overall market sentiments. It comprises of 30 stocks. These are large, well-established and financially sound companies from main sectors. The composition of companies may change from time to time as decided by SEBI/BSE. If Sensex go up, it means that most of the stocks in India went up during the given period. If the Sensex goes down, this tells you that the stock price of most of the major stocks on the BSE have gone down.
- The Nifty is also an indicator of major companies listed on NSE. The base year is taken as 1995 and the base value is set to 1000.Nifty is owned and managed by India Index Services and Products (IISL). Previously it consisted of 50 stocks but later with effect from 1st April 2016, IISL has modified the index structure and from then onwards it consists of 51 companies.
Now let’s see how these index points are calculated:
Computing index of next day requires the index value and the total market capitalisation of the previous day and is computed as follows:
Index value = Todays market capitalisation/Yesterdays market capitalisation x Yesterdays Index point.
Let’s understand the above with an example. If the market capitalisation of 10 securities (assume that there are only 10 companies in Sensex/Nifty hence considered to be the index) as at the beginning of 01.04.2017 amount to Rs.5 crores is taken as base and equated to 100 and at day end market capitalisation amounts to Rs.5.5 crores, then the index at the end of 01.04.2017 will be 110. i.e.
Opening Index x Closing Market capitalisation/Opening Market Capitalisation = 100 x 5.5/5 = 110
If at the end 02.04.2017, the market capitalisation is Rs.6.30 crores, then the index value would be 126.
Opening Index x Closing Market capitalisation/Opening Market Capitalisation = 110 x 6.3/5 = 126
Till now, I have discussed with you the basic knowledge of stock market. Now let’s discuss something related to trading on the stock market.
How to start trading and terms used while trading:
To start trading, Demat account is a must. It’s an account wherein you can hold shares of various companies in the dematerialised (electronic) form. It’s just like your savings bank account. Bank account holds money where as Demat account holds shares. In India, many companies offer Demat account facility. For example: Edelweiss, Indiabulls, Sharekhan, SMC, SAS online, Angel Broking etc.
Documents required for opening a Demat account:
- PAN card photocopy. As of April 2006, it is mandatory. If any person wants to open a Demat account, he/she should have a PAN card. Without a PAN card, you are not being eligible to open a Demat account.
- Address proof photocopy.
- Cancelled Cheque.
- 4 passport size photographs.
- Latest 6 months’ bank statement.
Charges in maintaining Demat account:
- Account opening fee.
- Annual maintenance fee.
- Brokerage cost.
- Government levy charges like STT, stamp duty etc.
Note: All the charges vary from broker to broker.
The information for each company is generally listed in either red or green. Red means the company’s stock price has gone down that day; conversely, green means the stock price has risen. Black colour indicates no change.
Clients can transfer funds into their trading account online through a secure payment gateway. This facility transfers funds instantly from the bank account to the trading account. Trading limits get updated immediately and the client can start trading in various segments – Equities, F&O and Currency. Similarly, online pay out request can be made to any of the banks with which the particular broking company have a tie-up.
Pay-In refers to money transferred from Bank account to Demat account while pay-out refers to money transferred from Demat account to Bank account.
How to decide a position while trading?
Whether to perform Buying contract (also called as long position) or selling contract (also called as short position). When you expect the share price to rise, long position shall be taken and when you expect share price to fall, short position shall be taken.
How to book profit/loss:
It can be done by taking opposite position. For example, you have purchased one Idea Cellular Ltd share @ Rs.100. Selling price is Rs.130 and assume that the brokerage charges are Rs.7. Net profit to be booked by selling the share (opposite position) is Rs.23.
Stop Loss order:
In simple words, the stop loss order is used to minimize the losses in share market. A stop loss is an order placed to buy or sell a stock once the price of a stock moves above or below a specified price by a trader. Stop loss order is a great method to save trader from heavy losses. Everyday who is investing in stock market must know how much loss they can bear and they must be ready to book loss at that time. Stop loss concept is a mind game. You must set in mind the loss you can bear.
Unrealised profit (or loss) and realised profit (or loss):
An unrealised gain is a profit that exists on paper, resulting from an investment. It is a profitable position that has yet to be sold in return for cash, such as a stock position that has increased in capital gains but still remains open. A gain becomes realised once the position is closed for a profit. Until the stock is not sold, the profit (or loss) is unrealised, also called paper profit or paper loss.
When the stock is sold, the profit (or loss) is realised.
Importance of timing i.e. when to book profit or loss:
It is the most difficult question to answer. It depends on investors’ expectations of profit and capacity of bearing loss. The simple answer is when you reach your expectations then book profit. When your loss exceeds your capacity of bearing it, book loss.
Limit order instructs your broker to buy or sell a stock at a particular price. The purchase or sell will not happen unless you get your price. While trading, always prefer limit order.
A market order is an order to buy or sell a stock at the best available price. Generally, this type of order will be executed immediately.
General economic rule of price rise and fall:
When the demand pressure (Buying pressure) is greater than selling pressure, price will rise and vice versa.
Meaning of Bull and Bear:
Bull market means rising trend. Bear market means falling trend. The actual origins of these expressions are unclear. The terms “bear” and “bull” are thought to derive from the way in which each animal attacks its opponents. That is, a bull will thrust its horns up into the air while a bear will swipe down. These actions were then related metaphorically to the movement of a market. If the trend was up, it was considered a bull market. If the trend was down, it was a bear market.
Intraday based trading:
Buying and selling of stocks on daily basis is called day trading. This is also called as intraday trading. Whatever you buy today have to sell it today or whatever you sell today you have to buy it today and very importantly during market hours that is 9:15 AM to 3:30 PM (Indian time). Contract entered on intraday basis must be booked/closed/squared/settled on same day. In other words, we have to book profit/loss on the same day. If you forget to book your contract, then it will be booked by your respective broking firm at the rate prevailing at the time of closing. Broker may also charge penalty for this.
Intraday long contract: First buy and then sell same day
Intraday short contract: First sell and then buy same day
Delivery based trading:
In delivery trading, as the name suggests, you have to take the delivery of stocks and after getting these stocks in your Demat account you can sell them at any time (or you can hold them till you want, there is no restriction). In delivery trading, you need to have the amount required to buy stock for example, if you want to buy 100 stocks of reliance at price 500 than you must have (100×500) Rs. 50,000 in your account. Once you purchase these stocks will get deposited in your Demat account. Then you can sell these stocks when the price of these stocks goes up or else you can sell whenever you want. Under this type of trading, there is no time limit or restriction to square off on the same day.
Delivery based long contract: First buy and then sell whenever you want.
Delivery based short contract: sell the stock you already have. The only requirement is that you must have purchased this share previously in delivery.
How to do research/how to excel in finance:
- Start trading
- Daily business newspaper
- App installation:Moneycontrol.comEconomic timesBusiness standard
- Daily business news:Zee BusinessCNBC Awaaz
“This is my first ever article. I hope you liked it and I think this article will also have a great impact for the beginners who would like to seek basic knowledge relating to stock market and trading.”
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