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How to invest in stock market - Part 1

Stock Exchanges

Desk

Stock exchange is a facility where investors can buy or sell securities. Securities are listed on stock exchanges and through them, we can see the current trading rates of securities which are set by demand and supply. There are two main stock exchanges in India – Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). There are around 5000 companies listed on BSE and its index is known as Sensex, which comprises of 30 companies and is an indicator of the overall trend in the markets. NSE has around 2000 listed companies. Its index is known as Nifty, it represents the weighted average price of 50 stocks.

The process of investing in stock market is fairly simple. There are 2 basic steps needed to be followed to be able to invest in Indian stock markets.

  1. Finding a broker - One can’t invest in share market directly. You need a broker, through which you will be able to sell or buy stocks. A broker can be any person or company which is authorised by SEBI to trade on exchanges. For ex- Zerodha, ICICI Securities etc.

  2. Opening a Demat Account - A Demat (Dematerialized) Account is used for holding financial securities in electronic form. A Demat Ac has to be opened through the same stockbrokers registered with NSE or BSE. Opening Demat Ac is an easy task and just requires a couple of documents like identity and address proof, Pan card and KYC. After opening a Demat Ac one can freely trade in stock market.

There is usually a yearly charge associated with the Demat Ac and a broker will charge brokerage on the trades executed. The Demat Ac charges and brokerage fee varies between brokers and an individual should choose one according to his/her needs.

Nowadays, we don’t even require to call brokers to transact. We can buy or sell securities directly through the online platform of our broker, which has made the process of investing very convenient. Now, once your trading account is ready and you have deposited some money in the brokers account you can start trading. There are different types of orders and objectives in trading. I will start with simple long term investing and then move towards more advanced topics like day trading and algorithmic trading.

To begin investing and actually buying a stock you need to place an order with your broker. This can be done using the trading tool/website provided by the broker. Few key things to note here is product and order type.

There are 3 main product types which any beginner should know of-

Cash and Carry (CNC) – This order type is used by equity traders. One should use this type of order only when they want the stock to be delivered in their Demat Ac. The stock is generally added to the Demat Ac in T+2 trading days. (T= the day when the trade is executed). This is what most long term investors use for buying and holding stocks.

Margin Intraday Square Off (MIS) – This order type is used by intraday traders and it needs to be squared off during the same trading day. The biggest advantage of using MIS is that a trader will not need to pay the entire amount, only a margin is required. This allows an intraday trader to buy more shares from less capital. It is called leveraged trading.

Normal Order (NRML) – It is used for trading in the future market. This order is used by traders who want to hold futures and options for more than a day. It does not provide extra leverage like the MIS. It is similar to CNC only difference is its used by Future and options Traders. (Will discuss more about derivatives in following posts)

Apart from this there are 3 main order types-

Market Order- A market order is placed for buying or selling at the current best available price, these types of orders will get executed immediately.

Limit Order- A limit order is placed to buy or sell stocks at a certain price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.

Stop Loss Order- A stop loss order is placed to limit the loss on a particular stock. A stop-loss order gets executed when it reaches a certain price. For ex- an investor purchased 100 shares of Reliance industries at 2000 and the stock is now trading at 1950. Now, the investor doesn’t want to sell the shares at the current market price and wants to wait for any upside gains, but at the same time, the investor can’t afford to lose much money. So, he can put a stop-loss order at 1930 and if the stock falls to this price then the order will get executed immediately.

So, these were some basic things that will help a beginner investor in getting started.

click here to read Part 2