The majority of people procrastinate when it comes to investing in the stock market. It is excellent that you are amongst the few that are actually trying to put their thoughts into action. Now that you have decided to dive, the next thing you’d mostly do is to search online for “How to Invest in Stock Market for Beginners: Tips”.
While there are indeed some reliable online portals with quality posts on stock market tips for beginners, most of it is not very helpful for someone new to stock trading. Rather than looking for innovative tricks or hacks to make money in the market, you should rely on our time-proven tips that help you become a better trader/investor.
1. Understand the difference between Trader and Investor
To start with, you should first understand the difference between a trader and an investor. A trader is someone who might buy stocks and might sell the same within minutes, hours, or days. An investor, on the other hand, is a long-term market participant who can hold on to his purchases for several months and even years.
You should clearly understand the difference between the two and know what you want to be. This is because trading strategies do not work for investors and investing strategies fail to work for traders. So, pick a side at the beginning as this will work as the foundation of your stock market journey.
2. Understand the Basics of the Stock Market
Once you have picked a side Trader or Investor, the next step in how to invest in the stock market is to get the basics right. Get a basic idea of what BSE, NSE, Sensex, and Nifty are. Try to know more about what stocks are, stock market timings, who is a stockbroker, how the market moves, etc. to get a general idea about the market.
In the bid to make quick money, most beginners often skip learning the basics. But if you are unaware of the basics, it will not be possible for you to build your own trading/investing strategies. Spend at least a few days mastering the basics so that you actually know what to do once you get yourself a trading account.
3. Selecting a Stockbroker
One of the most important decisions that you’d be required to make at the start of your trading journey is to pick a stockbroker. There are several stock brokers in India, and the selection can be difficult for beginners. Focus on factors such as the reputation of the broker, trading portal or software, and brokerage to make a decision.
Give special attention to the brokerage as you will be required to pay it irrespective of whether you make profits or losses on a trade. The brokerage can either be a flat fee or some percentage of the trade value. This is especially important for stock traders as the brokerage of multiple trades adds up very quickly.
4. Use Stop Loss on every trade
Check the order screen on the trading portal of your stockbroker, and you will see the stop-loss option. A stop-loss helps you reduce your losses as it lets you select a price at which your position will be automatically squared off. For instance, if you are purchasing 100 shares of SBI at Rs. 350 and expect its price to rise, you can put a stop loss at Rs. 345.
If at all the stock price falls, your 100 shares will be automatically squared off when it reaches Rs. 345. If you want to know how to invest in the stock market successfully, it is essential to use stop-loss on all of your trades at least in your initial days of trading. Most brokers now allow you to place a stop loss at the time you place the buy/sell order.
5. Avoid using the Margin Facility
Lack of capital is one of the most common problems for stock market traders. To help traders with this problem, stockbrokers now offer a margin facility. For instance, a broker can provide you with a margin of 5x on your capital. This means that if your trading capital is Rs. 1 lakh, you can still buy shares worth Rs. 5 lakhs.
However, trades placed with margin are generally required to be squared off before the market closes on the same day. While the margin facility may be beneficial for professional traders, beginners should avoid using it as it could result in severe losses. Only trade with the capital you have and use the margin facility after gaining some experience.
6. Understand different types of Orders
To help traders who cannot spend long hours in front of the screen when the market is live, most stockbrokers now offer many different types of trade orders. Some of the most common types of trades are Normal, Stoploss (SL), Margin Intraday Square up (MIS), Bracket Order (BO), Limit Order, and Cover Order (CO).
Understand how different types of orders work in order to be a knowledgeable trader. If you are looking for how to invest in stocks for beginners with little money, it is better to stick to normal and stop-loss orders. Normal orders can only be placed if you have the required capital for the purchase available in your trading account.
7. Do not short-sell in the initial days
You can make money in the stock market, even when the price of a stock is falling. Known as short-selling, it is the opposite of placing a buy order. With a buy order, you first purchase the shares at a particular price and then sell the same probably at a higher price. The difference in price multiplied by the number of shares you have purchased will be your profit.
With short-selling, you first place a sell order at a particular price and then buy the same probably at a lower price. The difference in price multiplied by the number of shares sold will be your profit. While short-selling allows you to take advantage of a falling market, you should avoid using it when you are still new. Master the basic buy-and-sell order first before experimenting with sell-and-buy.
8. Stay away from the Derivatives Market
Another valuable tip is to avoid trading stock derivatives. The derivatives market is mostly made up of futures and options. These are contract-based purchases that have a fixed expiry date. Just like the margin facility, the derivatives market looks very attractive as it allows you to make bigger purchases with little capital.
For instance, you can purchase a futures contract of SBI with only a margin of about Rs. 2 lakhs at the current price of Rs. 360. One futures contract of SBI contains 3000 shares. Purchasing 3000 shares of SBI in the cash market at the price of Rs. 360 each would cost you more than Rs. 10 lakhs. While professional traders regularly trade derivatives, they are not for beginners.
9. Stock Market is not for Everyone
While the stock market can be highly rewarding, and a lot of people have made a fortune just from the market, it is not for everyone. Successful stock trading and investing require a lot of knowledge, skills, experience, and discipline and not everyone has or can develop these qualities.
One of the most important pieces of advice is to stay away from the market if you have tried it a few times, but things failed to work in your favour. If you are still interested in the stock market, you can consider investing in equity mutual funds. These funds invest your money in the stock market, and the portfolio is managed by experienced professionals.
Some other important Dos and Don’ts
- Start with small capital in the initial days
- Use a demo trading account to improve trade accuracy
- Always have a stop loss and target price before placing a trade
- Understand technical and fundamental analysis if you want to be a stock trader/investor
- Diversify your investment if you have long-term investing goals
- Try to understand the financial reports of companies
- Do not trade stocks that are in news for good or bad reasons
- Stay away from external advice
- Never invest the money you need
- Beginners should avoid IPOs
- Do not get emotionally attached to a stock
- Do not try to time the market
Starting off on the right foot
“Well begun is half done” is a popular proverb that perfectly suits beginners wanting to trade/invest in the stock market. Yes, the world of the stock market can be complicated and risky. However, if you are able to start right, you might actually be able to pave a path full of success and profits.
Always remember that there is no quick or easy money in the stock market. You should not enter the market with such beliefs. It will require a lot of dedication, knowledge, discipline, and time. But if you do have what it takes to succeed, the market can bring in great returns.
If all of this is just too much for you, prefer investing in equity mutual funds. They too invest your money in stocks, but the investment decisions are taken by experienced professionals to keep the risks to a minimum.
Financial and Business expert having 30+ Years of vast experience in running successful businesses and managing finance.