Get ready to start an exciting journey into the world of stock trading! If you’ve ever wondered about how to get started in this dynamic and potentially lucrative field, then this beginner’s guide is tailor-made for you.
Stock trading is the art of making money in stock market by doing nothing. Here, by ‘doing nothing’ means you buy stocks and keep monitoring their performance. If you find right stocks and trade with due care and discipline, you will see your money growing with time while you enjoy leisure and spend quality time with your family.
Trading in stock market for beginners is a confusing task. However, we’ll walk you through the basics of stock trading, starting from understanding the stock market, opening a trading account to getting insight into essential concepts of trading like stock market trends, risk management and the best strategies for beginners.
By the time you finish reading, you’ll feel confident and ready to take those initial steps into the thrilling world of stock trading. So, buckle up and get ready to delve into the beginner’s guide that will set you on the path to financial empowerment and investment success!
Table of Contents Hide
- Education And Learning
- Understanding The Stock Market
- Benefits of Trading Stocks
- Stock Trading Strategies for Beginners
- Open a Trading Account
- Understand The Terms Used in Stock Trading
- Get a Computer with Internet Connection
- Get a Charting Software
- Learn Technical Analysis
- Research- Build a Stock Trading System
- Make a Stock Trading Plan
- Practice Stock Trading
- Build Enough Trading Capital
- Risk Management in Stock Trading
- Maintain A Trading Journal
- Human Emotions Control
- Learning from Successful Stock Traders
Education And Learning
Learning is the first step to start doing any work. Trading in stock market is a serious business. Your hard-earned money is going to be at risk, keep it in mind.
Before you start trading stocks straightway as the majority of the amateur traders do, it is important to learn trading. For this, you can subscribe for stock trading courses, websites, webinars, books written on stock market and stock trading by the traders where they discuss their stories and successful trading strategies.
Plenty of literature is available on internet which you can google to search, find short books on reading apps like kindle. Markets keep changing, strategies keep changing. You can only keep pace with changing patterns if you make a habit of reading regularly.
Understanding The Stock Market
Stock market is a big market for buying and selling stocks, futures and options. The transactions for buying and selling of stocks takes place at a platform called as stock exchange. There can be one or more stock exchanges in any country.
In USA, there is New York Stock Exchange and NASDAQ. Similarly, there is London Stock Exchange, Tokyo Stock Exchange. In India, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the major stock exchanges.
Stock exchanges allow delivery trading as well as derivatives trading.
Delivery trading involves buying stocks and holding for days, weeks, months or years. The stocks are delivered to your trading account and the ownership of stocks is transferred to you.
Derivatives trading involving futures trading and options trading. It operates in time bound contracts. You must know that derivatives trading is very risky than delivery trading. The latter is the best option to start trading in stock markets for beginners.
It’s important to note that the stock market is not a guaranteed way to make money. Prices of stocks keep fluctuating constantly. The investments may yield positive or negative returns. However, with the right knowledge and strategies, individuals can make informed decisions and potentially benefit from the stock market with reduced risk.
Benefits of Trading Stocks
Stock trading offers several benefits for individuals looking to grow their wealth.
- One of the primary advantages is the potential for significant returns on investment. Historically, the stock market has provided higher returns compared to other investment options such as bonds or savings accounts.
- Additionally, stocks offer the opportunity for capital appreciation, allowing investors to benefit from the growth of the companies they have invested in.
- Furthermore, stock trading provides a level of liquidity that other investments may not offer. This means that investors can easily buy and sell stocks, converting their investments into cash relatively quickly.
- Moreover, stock trading allows individuals to diversify their investment portfolios, spreading their risk across different companies and industries. Diversification can help mitigate potential losses and stabilize investment returns over time.
Stock Trading Strategies for Beginners
As a beginner, it’s crucial to develop a trading strategy that aligns with your financial goals and risk tolerance before you start with trading stocks.
One common approach for beginners is long-term investing, where individuals buy stocks with the intention of holding them for an extended period, typically years. This strategy allows investors to benefit from the long-term growth potential of the companies they’ve invested in.
Another strategy is value investing, which involves identifying undervalued stocks and investing in them with the expectation that their value will increase over time. Value investing is based on fundamental analysis of stocks.
For those interested in starting more active stock trading, day trading and swing trading are popular strategies.
Intraday trading or day trading involves buying and selling stocks within the same trading day, Day trader can make handsome money in day trading but can also lose handsome money with equal possibility.
Swing trading: swing trading typically involves holding stocks for several days or weeks to capitalise on short-term price movements. The swing trades provides you the luxury of time to manage the trades.
Positional trading is similar to swing trading with the difference that the trades last for months or years. It is useful to ride big trend in stock prices lasting over weeks or months. Big fund houses and institutional investors are usually positional traders.
It’s essential for beginners to thoroughly research and understand the risks associated with each strategy before diving in.
Up to now, you must have decided if you want to be :
- In delivery trading or derivatives trading
- Day trader, swing trader or a positional trader
Open a Trading Account
Before you can start trading stocks, you need to open a trading account or a demat account. A trading account is a platform that allows you to buy and sell stocks as well as other investment products. When choosing a broker for a trading account, you should consider factors such as brokerage fees, research tools they provide and the customer support.
Many brokerage firms offer online platforms that provide access to stock market data, research reports, and trading tools. It’s important to select a trading account that suits your trading preferences and investment objectives.
ICICI Direct is a leading broker in the country and offers one of the best services among brokers. They have zero account opening fee and the annual maintenance charges are also zero for the first year. You may open a trading account with ICICI Direct and start trading stocks with ease.
Opening a brokerage account involves completing an application, providing personal information, and funding the account. Once your account is set up and funded, you can start exploring the stock market and placing trades based on your investment strategy and research.
Understand The Terms Used in Stock Trading
Before you start trading, it’s important to familiarise yourself with some of the most common terms used in stock trading. These include “bid price” which is the highest amount a buyer is willing to pay for a share; “ask price” which is the lowest amount at which a seller is willing to sell; “spread” which refers to the gap between the bid and ask prices; and “in-the-money or out-of-the money” which tells you whether option trades are profitable before they expire. A good rule of thumb: research each term carefully and understand what they mean before investing any money.
Get a Computer with Internet Connection
When using an online stock trading account, you’ll need a computer or laptop with a decent internet connection to start. Smartphones are also good alternatives to computers.
It is advisable that you use an internet connection having decent speed. Slow connection can adversely affect your trading especially when placing market orders. In your trading account, you’ll see all the options of buying and selling the stocks as per your trading plan.
Get a Charting Software
Charting software is an important part of your trading business. Most of the brokers provide charting software also when you open trading account with them. They can be free or with a very nominal fee and are downloadable from a link in your trading account. With the help of charting software, you will be doing your technical analysis by looking the technical charts of the stock in which you want to trade.
The popular stock charting tools are Tradingview, Metastock, NinjaTrader, eSignal and ProfitSource to name a few. They are premium software with certain fee. However, you can also use free charts at stockcharts, yahoo finance or google finance for your basic analysis for any stock.
Chart reading is the most important part of stock research for trading. Charts give you the appropriate buy and sell signals and price levels to enter or exit a trade. Chart reading is like a torch while you are moving in a pitch dark tunnel.
Learn Technical Analysis
Technical analysis is the technique of predicting the future price actions of any stock or security on the basis of technical charts. You should have a knowledge of basic tools of technical analysis before you start trading stocks.
Different types of charts are available for chart reading – mountain charts, line charts, OHLC charts and candlestick charts. Candlestick charts are the best charts although some traders prefer OHLC charts. Both charts show same information.
Learning the basics of the technical analysis helps you minimise your risk and maximise your rewards by finding appropriate buy and sell signals. Finding the support, resistance and trend lines of the stock movement are important aspects of the technical analysis.
With technical analysis, you can find your target price and stop-loss price. Target price of a stock is what you expect to be achieved after you buy the stock. Stop-loss is stock price level up to which you can bear the loss when stock starts falling. Supports and resistances to stock prices on technical charts make your target prices and stop-loss prices.
Suppose a stock is trading ₹ 410 price. You expect it to move higher towards ₹ 430. This is your target price. Now you do not want to loose more than ₹ 10 per share if it starts falling. You place a stop-loss at ₹ 410. If the stock does not move higher and starts falling towards ₹ 400 or lower, system will sell your shares as soon as the prices reach ₹ 400. So have stopped your further loss.
Learn to identify the chart patterns and candlestick patterns to make your trading strategy work in your favour. There are several types of chart patterns like triangles, wedges, head and shoulders patterns, flags and pennants. They give you the target prices and stop- loss prices for a stock.
Research- Build a Stock Trading System
Research is the key when it comes to stock trading. Before you start trading in a stock, it is important do necessary research regarding the price action in that stock. A robust trading system can help you do the research with ease.
Trading system is a system involving multiple technical indicators to get buy and sell signals in stock trading. This system gives you appropriate entry and exit of prices for a trade. This data helps you to keep your risks to the minimum and maximise the profits. Use your charting software to build a trading system appropriate for you.
To build a trading system, you need technical charts along with technical indicators and oscillators like moving averages, relative strength index (RSI), moving average convergence divergence (MACD) and stochastics et cetera. There are hundreds of advanced technical indicators you can use. However, I suggest you to keep it as simple as possible. Use the most popular indicators which are widely used by majority of the traders. Avoid complicated indicators which you do not understand.
I use a trading system based on candlestick chart, 10 and 21 period exponential moving averages (EMA), 50 and 200 period simple moving averages with two technical indicators – RSI and MACD. I am a swing-trader, so this system works best for me. You can build your own trading system with indicators you find suitable to you.
If you want to ‘go long’ or buy shares, you should buy only when the stock is moving above the moving averages with technical indicators in the buy zone. You can buy the stock above the 10 day, 21 day, 50 day or 200 day moving averages. The bigger the moving average, the more time horizon you have to keep. The short the moving average, the lesser the time horizon.
If you want to go for short selling, you short the stock below the moving averages with technical indicators in the sell zone.
You should regularly read the technical charts to find stocks for trading. Look for different types of chart patterns which give you bullish or bearish signals. Trade only on the basis of trading system and chart patterns.
Professional traders use these trading systems for stock research and planning their trades. Having an appropriate trading plan gives you appropriate buy and sell signals and keeps the emotions like greed and fear out while trading stocks.
Make a Stock Trading Plan
A trading plan tells you how to trade stocks with minimum risk and maximum profit. Trading plan is made when the stock market is close. You read charts for all the stocks you want to trade in with your trading system. You find your target price, stop loss price and your entry price.
It is better to write your trading plan on a paper beforehand you enter a trade. This ensures that you stick to it with discipline and do not stray away. Your trading plan must have clearly written:
- Entry Price
- Target Price
- Stop loss Price
- Time Horizon – Intraday Trade, Swing Trade, Positional Trade
- Delivery Trading, Futures Trading or Options Trading
Execute this plan when the market opens and keep monitoring your position regularly. Keep the emotions – fear and greed away when following the plan. Controlling these emotions takes time and you will definitely get over them if you follow the plan with discipline.
Practice Stock Trading
After completing all the necessary requirement, you should practice stock trading to have an idea how does stock trading work. Practice is the best way to learn trading. There are several stock trading websites where you can practice stock trading with paper trading. Although most of them charge some fee, icicidirect offers free virtual stock trading where you can do practice.
Virtual trading or paper trading is the process of trading without using real money. It works the same way as the trading with real money. You can test your trading system and trading techniques through paper trading before you risk your real money.
Build Enough Trading Capital
It is important to have enough capital to get significant gains in stock trading. It is worth mentioning that this is the capital or the cash you can afford to lose. Of course, there is no lower limit to the money required to test waters in stock market trading.
Having enough capital allows you to manage the trades, add additional positions when trade starts working and gives the luxury of selling half position with notable profits while letting the remaining positions run for further gains with trailing stop losses.
Risk Management in Stock Trading
Managing risk is a critical aspect of successful stock trading. While the potential for high returns exists, so does the potential for significant losses. As a beginner, how to protect your trading capital while trading stocks is really important.
Setting stop-loss orders is an important risk management technique. It allows traders to automatically sell a stock if it reaches a predetermined price, limiting potential losses. Any trade has 50% possibility of going in your favor. With necessary stock research, you can make this possibility 60% or 70% but not 100%. The rest 30 or 40% which saves you of losses is your risk management skill.
1% rule of risk is the most popular rule for stock trading. It states that should never risk more than 1% of your total trading capital in any trade. If you do not follow this rule, you would not be left trading for long and lose your money before you know.
Suppose you have a total trading capital of ₹100,000 and you want to buy a stock trading at ₹100. The stop loss for the trade is at ₹95 which is ₹5 lower than buying price. You risk 1% which is ₹1000. With a risk of ₹5 per share, you should buy shares = 1000/5 = 200 only.
If your stop loss is triggered, you would exit the trade, no matter what. Do not wait for the trade to reverse and cover your loss. You may lose more.
Additionally, maintaining a long-term perspective, portfolio diversification and avoiding emotional decision-making can help you reduce the impact of short-term market fluctuations. By implementing effective risk management techniques, beginners can minimize potential losses and preserve their trading capital.
Maintain A Trading Journal
A trading journal is like a trading dairy. It is used to record each and every trade you execute. The records help you to take feedback and review your past performance in stock trading.
Trading journal includes different aspects of a trade like the date of trade, the amount invested or the number of shares traded, outcome of the trade and the important notes about each particular trade.
To succeed in trading, you must adhere to maintain a trading journal on regular basis.
Human Emotions Control
Stock trading is not just limited to the facts I mentioned above. The biggest deciding factors for the success of your trading can be the two human emotions ;
Both of them keep playing their role as you enter the stock market. A random market fall can make you panic, especially if you are holding big positions without proper risk management. This may lead you exiting the market immediately fearing further fall. That becomes even more painful when you exit and you see market coming back to those levels again sooner than later.
On the other hand, a decent favourable market move can put you in profits sooner than expected and you try to exit even before the targets are met. This makes you missing the potential profits due to greed or fear.
You can overcome the human emotions of fear and greed by using a proper trading plan. A trading plan gives you clear trading signal with entry price, target price and stop loss price. Before taking a trade, write this trading plan on a paper and execute when the market opens. It will make you feel confident in the market.
The entry, exit and stop loss prices of a trading plan are determined by chart.
Learning from Successful Stock Traders
Learning from the experiences and strategies of successful stock traders can provide valuable insights for beginners. Many successful traders share their knowledge through books, podcasts, and online resources like social media. Studying the approaches and mindsets of accomplished traders, beginners can gain valuable perspectives on trading strategies, risk management, and market dynamics before they start their own stock trading endeavor.
Moreover, seeking mentorship or joining trading communities can offer opportunities to learn from seasoned traders and expand your knowledge base. Engaging with experienced traders can provide practical advice, trading tips and real-world examples that can help beginners navigate the complexities of stock trading.
Personally, I was a losing trader till I was doing it on my own. Reading books of elite traders and learning from online resources helped me establish winning stock trading strategies.
Continuous learning and seeking guidance from experienced traders can accelerate the learning curve for beginners and improve their trading skills.
In conclusion, venturing into stock trading as a beginner can be an exciting and rewarding business. By understanding the fundamentals of the stock market, developing sound trading strategies, and leveraging available resources, beginners can start on a path to financial empowerment and investment success.
While stock trading involves inherent risks, the potential for significant returns and wealth accumulation makes it an attractive investment option for many individuals. With the right knowledge, discipline, and perseverance, beginners can navigate the stock market with confidence and work towards achieving their financial goals. So, take the insights gained from this beginner’s guide and start on your stock trading journey with enthusiasm and determination!
As you embark on your stock trading journey, remember that continuous learning, adaptability, and disciplined decision-making are key pillars of success in the dynamic world of stock trading. With dedication and a commitment to ongoing growth, you can position yourself for long-term success and financial prosperity in the stock market.
Now that you have a comprehensive understanding of the basics, benefits, strategies, and tools associated with stock trading, you’re well-equipped to take those crucial initial steps into the thrilling world of stock trading. Embrace the learning process, stay informed, and remain focused on your financial objectives as you embark on this exciting journey. Happy trading!