What is the stock market?

For the uninitiated, the stock market consists of all markets and exchanges in which there occurs a steady buying, selling and issuance of shares by publicly held companies. There exist formal entities that ensure that these activities are regulated and abide by prescribed rules. In India, the Securities and Exchange Board of India (or SEBI) is responsible for the same.

Things to consider each time you trade:

  1. Read up on the stock market –

Prior to investing in the stock market, it is vital that traders be aware of exactly what investing in the stock market entails. The internet provides a vast magnitude of resources which should be taken advantage of. Financial articles and online tutorials that serve as guides on how to trade provide crucial information that traders should be well acquainted with. By inculcating the practice of studying price action of a given stock – which visualizes the movement of said stock’s price over time, traders can learn how to extrapolate formations and trends in order to make educated trading decisions. Keeping abreast of what the company of a given stock does and understanding their business model is telling.

  1. Practice trading online –

Beginners who want to hone their skills can practice trading without spending money by partaking in paper trading. A simulated trade, it allows for investors to invest virtually and learn the way the stock market operates. Traders can also test run new investment strategies before incorporating them to real-world stock markets. Paper trading allows for errors and major risks as there are no real losses. Moreover, there is no pressing need to create a demat account in order to operate it. It is important to note that true emotions elicited by market conditions may not be generated in such scenarios.

  1. Buy low sell high –

Paramount for good investing is to buy stocks when their price is low and sell them when they acquire a higher value thereby generating a gain. Implementing this practice is not as straightforward as it may seem. This is because prices fluctuate based on emotions, psychology, and current world events and cannot always be accurately predicted. It is important to avoid herd instinct when selecting a stock to invest in, as it is this very mentality which drives stock prices. In order to make a more informed investment decision the following should be considered –

(i) Moving averages – Derived from stock history, they show the general trajectory of a stock and where it is likely to be headed.

(ii)  Business cycle – This cycle follows an emotional cycle wherein market fear follows market greed followed by fear again. The best time to buy stocks is when fear is at its peak which is when the economy is in a recession. At this point in time, it is possible to avail of stocks at low prices. Conversely, when the economy booms, the prices of stocks soar and allow traders to cash in, realising gains should they sell their shares.

(iii) Consumer sentiment – A statistical measure, consumer sentiment refers to the overall health of the economy determined by consumer opinion. It indicates how optimistic consumers feel about their finances and the state of the economy.

  1. Diversification –

In order to protect themselves, traders ought to have as diverse a portfolio as possible. Investing in a wide variety of stocks spread over diverse sectors, is ideal as it cushions traders against inevitable market setbacks and reduces volatility. Building up a diverse portfolio requires time, patience, research and considerable funds.

  1. Risks and the ability to bounce back

Prior to investing in the stock market, it is important to assess one’s own finances and risk-taking abilities. There are no guarantees when investing in a stock market as its fundamental nature is to inevitably gravitate towards volatility. Conventionally, the older an individual gets, the lower their threshold for risk. Older traders – as well as those with limited funds, are generally advised to invest in stalwart shares. Stalwart shares refer to those shares offered by companies that provide necessary goods and services that are always in demand. They have strong balance sheets, little or no debt along with a steady cash flow. Stalwart shares in turn, aren’t known to generate elephantine year-over-year returns. Instead, they provide traders with steady, predictable returns that are capable of yields of 50% in a 4-to-5-year time frame. Mutual funds also offer stability to trader portfolios. When trading, traders must be aware of the differences between intraday trading charges and delivery charges. Intraday trading charges aren’t as high as delivery charges as stocks are bought and sold in a given day. Delivery charges are steeper as stocks are held for a period of time before being sold.

  1. Consider the price of a stock –

When trading it is important that traders not be swayed by the price of stocks. Stocks shouldn’t be viewed and bought based on their price alone. Take for instance stocks valued at INR2500 aren’t to be viewed as expensive and those valued at INR25 aren’t to be considered inexpensive. While it may be easier for those with limited funds to make multiple investments in lowly priced stocks, this might not be the best strategy in the long run. If this is applied to a broader spectrum, when an individual sets out to buy groceries they do so with a specific list in hand rather than buying items based on prices alone.  Fewer shares can be purchased, suitable to one’s budget rather than lots of 10 / 50/ 100 shares.

  1. Traders must know the sort of buy or sell order they enter into which can be restricted by price or time frames. Limit orders are those orders which are only carried out by stockbrokers provided the price matches what the trader wishes them to be. Stop-loss orders are given to stockbrokers by traders to prevent a big drop in the value of their stocks. These are often set below the current market price. In case the value of said stock plummets to this price, brokers have the right to convert stock orders into market orders and sell the given stocks. Stop-loss orders therefore act as an insurance against loss. Similarly, trailing stops can be utilized to protect profits.

To conclude, in addition to the aforementioned points, traders must also be wary of investment scams. Proliferating the market presently, they have a wide presence on the internet. Traders should not be lured by the temptation they provide in the form of “inside deals”.