When you have decided to trade in the stock markets, you begin by opening your trading account and your demat account. That is where the entire process begins. As a beginner in the stock markets, you have to understand the appropriate process flow and the basic rules to be followed before you can actually start trading. After all, the more prepared you are before trading, the less likely you are to be surprised by the vagaries of the market…
How beginners should go about trading in the stock markets…
• First understand the process. You cannot be a good trader unless you understand the process from end to end. Before you start out in the stock market, understand how it all works. How you need to fund your trading account (you can do it online and offline); how your demat account gets credited; how to read your contract notes (understand rates and costs); how to interpret your ledger statements (get your actual costs and profits) etc? All this will be critical when you get to actual execution.
• Whether you are a trader or an investor, a phased approach will serve you better than a lump-sum approach to investing. The phased approach has two advantages. Firstly, it gives you the benefit of rupee cost averaging especially in a volatile market. This reduces your cost of acquisition. Secondly, you are risking a small portion of your capital each time and that permits to take corrective action where required. Even risk is easier to manage in this context.
• Don’t jump straight into aggressive trading. The job of a trader may appear to be very macho and fanciful but it is for someone who has been in the market for a long time. When you are starting out first learn the ropes of the market by understanding what you are buying and then understanding why you are buying it. The same logic applies when you are selling also.
• As a trader it is essential to keep strict stop losses and the sooner you get into that habit the better it is. That will really help you in later years. It need not always be a trader’s stop loss and can also be a mental level wherein you will just decide to call it quits from that position. Ideally, as a trader, your stop loss level should be part of your order. Stock loss based investing is a discipline that you need to inculcate to survive as a trader.
• As a trader, it is also essential to book profits at regular intervals. Profit is what you book so get into the habit of booking profits and getting money into your bank account frequently. It makes a lot of difference to your confidence when you see the profit in your bank. Don’t start off in the market with a long-term perspective and dream of becoming a Warren Buffet. In the equity markets, there is nothing as powerful as actually moving money in and out. Once you see profits in your bank account, your confidence and conviction will go up sharply. Keep taking profits at regular intervals.
• You cannot say that you are naïve at research and analysis. Research what you are buying. You do not have to be a professional analyst to understand stocks. If you understand basics of demand and supply economics you can do a good job of understanding the potential of stocks quite well. It is less of rocket science and more of logic. First convince yourself that you see value in what you buy and that you have a strong reason to buy or to sell.
• Continuously engage your broker / advisor with questions before investing. If the advisor tells you that a particular stock is good then you must ask why. Please do background work on the internet and cross check details and data points? Most advisors will be more than happy to assist you if you are genuinely interested.
• Be wary of get-rich fast kinds of tips. Nobody ever made millions by listening to hot tips and WhatsApp messages. They are at best meant for your entertainment and treat it thus. You are likely to be successful if you focus on the strength of the company you are investing in.
• You must have an absolute commitment to your trading activity. If you are looking at investing as a temporary diversion, then you are best advised to give it up. Trading is a full time job and it calls for a huge investment of time, effort and money from your side. For you that is a Hobson’s choice.
• There are times you must stay out of the market and your trading wisdom is all about knowing when. When to buy; when to sell and when to do nothing are all important decisions as a trader. When to do nothing is perhaps the most difficult and important decision. In times of market volatility. When in doubt it is always best to stay out.
As Euclid said, there is no royal route to geometry and there is no royal route to trading stocks. Do you homework, keep the discipline and the rest will follow.