How To Start Trading Stocks – A Beginner’s Guide

Share trading is a fascinating business option. Learn how to start trading stocks and make money in stock market if you are interested in stocks and shares.

Trading is a highly rewarding business idea. Buying and selling of securities to make money is what is trading known as. Stocks, commodities, currencies or forex, exchange traded funds (ETFs), bonds are the different types of securities which are traded.

Buying and selling stocks to make money in stock market is known as stock trading. It is also called as equity trading. As a trader, you want to buy stocks at low stock price and sell them later at higher price. The difference between the selling and buying price is your profit earned. Apart from stocks, you can also trade futures and options.

Stock trading is one of the best business in the world. You require minimum infrastructure to set up this business. You can do trading at home or on the go using mobile devices using an online trading account. However, trading needs understanding the stock market and the stock trading basics to be a successful trader.

Stock trading is the art of making money in stock market by doing nothing. By ‘doing nothing’, I mean you create a position in the market and keep monitoring the position. If you find a right stock and trade with due care and discipline, you will see profits rising and your money growing with time while you can also enjoy leisure, spend time with your family or keep doing your regular job if you are already employed.

Trading in stock market for beginners is a confusing task as they are totally new to the stock market and do not know how to start trading stocks. This is a guide to learn how to trade stocks and start making money in the stock market.

How To Start Trading Stocks

There are some prerequisites needed to be completed for getting started trading stocks. This is like acquiring infrastructure for setting up a business. Acquiring the skills and knowledge to trade, the approach, the discipline, the risk management – everything is important for playing the stock market.

Let us start the journey to learn to trade the market!

Education And Learning

Learning is the first step to start doing any work. Trading and investing in stocks is a business, a serious business. Your hard earned money is going to be at risk, keep it in mind. To learn trading, you can subscribe for stock trading courses, stock trading websites, webinars, books written on stock market and stock trading, books written 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. Learn stock market, stock trading basics as much as you can. Read about technical charts and technical indicators to make yourself more capable of doing accurate stock research.

Understanding The Stock Market

Stock market is a big market for buying and selling stocks, futures, options. The transactions for buying and selling of securities takes place at a platform called as stock exchange. There can be one or more than one 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.

Thousands of shares or stocks trade at the stock exchanges. If you wonder where to buy stocks then it is the stock exchanges. This is called delivery trading because the stocks are delivered to your account when you buy stocks. There is also derivatives trading which involves futures trading and options trading. You must know that derivatives trading is very risky than delivery trading. The later is the best option to start trading for beginners. For trading, you need to open a trading account with a stock broker. You can google it to find the best stock brokers in your area.

There are three ways you can trade the market – intraday trading, swing trading and positional trading.

Intraday trading or day trading is when the trade lasts for only one trading day. You buy and sell shares during the day and exit the market before the close of the market. Day trader can make handsome money in day trading but also can lose handsome money with equal possibility. Most of the traders are fascinated to day trading to make quick money in the market. Day traders can also take the advantage of margin trading if they are short of cash for trading.

Swing trading is when you carry forward your trading position to next trading day. The swing trade can last for few days to few weeks. Some section of the traders prefer swing trading because it gives the luxury of time to manage the trades. It gives the best rewards when the stock market trends in one direction and is not in sideways mode. Stock market trends most of the times in one direction – uptrend or downtrend. When there is no trend, it is called sideways market. You must identify and follow a trend to succeed in trading.

Positional trading is similar to swing trading with the difference that the trades last for months or years. Big fund houses and institutional investors are usually positional traders.

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

After you understand the basics, you need a trading account. A trading account provides you the stock trading platform. You can get your trading account opened with a stock broker.

You can search online for the best broker in your area and get your account opened. It is important to compare the account opening fee, annual fee and most importantly brokerage rates among different stockbrokers.

Open a trading account with the broker which suits you best. Although it is human tendency to look for the lowest rates, but I would advise you to look for the quality of services offered also. After all, quality has a price.

Nowadays, all the trading accounts offered are online. These are also known as demat accounts because the stocks held by you in the account are in dematerialised form and not in physical form as it used to be in the earlier times.

You can also have offline accounts too if you are not interested in placing your buy or sell orders online by yourself. In offline accounts, you instruct someone else to place orders for you. He can be a broker or a relationship manager. When using offline services, you end up paying higher brokerages as it includes fee of your relationship manager too.

It is best if you use online accounts and do the trading by yourself. Brokerages are also significantly lower than offline trading.

Get A Computer with Internet Connection

When using an online trading account, you’ll need a computer or laptop with a decent internet connection for doing the transactions. Smartphones are also good alternatives to computers. Share trading using an internet based trading account with the help of a computer or mobile phone is what is online trading is known as.

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 demat 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 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 software are 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

Charting software shall be of no use if you are not familiar with the basics of technical analysis. The later is the technique of predicting the future price actions of any stock or security on the basis of technical charts of past price action. 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.

You should know the basics of the technical analysis at least so as to minimize your risk and maximize your rewards. 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 enter a trade and buy a 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 favor. 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.

Build A Trading System

Trading system is a system to get buy signals 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 maximize 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 and this system works best for me. You can build your own trading system which 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. 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 a appropriate trading plan gives you appropriate buy and sell signals and keeps the emotions like greed and fear out, during a trade.

Make A 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. 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.

Do Proper Risk Management

Risk management is the most important part of stock market trading. Any trade can go wrong. 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. You 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.

Conclusion

Trading is a serious business. It takes learning, time, patience, trading plan and proper risk management to be a successful trader. With paper trading and practice, you can gain confidence before you start stock market trading with real money.

This is all but not limited to know how to start trading stocks in stock market. This will definitely help you in getting started trading stocks and making money.