A Step by Step Guide to Start Stock Trading for Beginners
“Trading is not for the dabblers, the dreamers, or the desperate. It requires, above all, one steadfast trait of dedication. So if you are going to trade, trade like you mean it”-Rod Cas.
Quite a perfect quote to define traders’ dedication and hard work to establish trades that offer profits. This is why few traders have become millionaires while few have lost everything. For a beginner in the trading market, it is important to know how to start and the right steps to follow.
So, let us explore this stock trading guide to be followed to start stock trading in the stock market for beginners here. But before that, let us have a brief idea of what stock trading is all about?
About Stock Trading
Stock trading entails purchasing and selling company shares to profit from price fluctuations daily. Traders keep a close eye on these equities’ short-term price changes and aim to buy cheap and sell high. Individual stock trading can result in quick profits for those who time the market well, but it also entails the risk of huge losses.
A single company’s fortunes can rise faster than the market, but they can also fall faster. This is the basic idea on which the stock market runs. Additionally, micro and macroeconomic factors also affect the prices in the share market. Based on the timing and trades, there are two types of share trading in the stock market:
- Active Trading
An investor who makes 10 or more trades each month is considered active. Typically, they employ a strategy that significantly relies on market timing, attempting to profit from short-term developments in the following weeks or months.
- Day Trading
Day trading is used by investors who buy, sell and close their positions in the same stock in a single trading day, with little regard for the underlying firms’ inner workings. A day trader’s goal is to profit from daily price movements in the next few minutes, hours, or days.
Steps for Beginners To Start Stock Trading
Being a beginner in the stock market, you need to be aware of the various terms, aspects, and processes to be followed to ensure no losses. But at the same time, it is important to know the step-wise process to be followed to start trading successfully in the market. So if you want to be a stock market trader, here are the broad steps that you will be required to follow:
1] Open a Demat Account
If you wish to start trading, the first thing you would need is a Demat account. The Demat account is also known as the brokerage account, specifically designed to hold the investment options purchased by the investor from the stock market. This account can be opened with any bank or can even be opened at various stock trading firms. The brokerage of every firm varies depending on its terms and conditions. There is also a small fee that one should pay to open a Demat account, which is yearly chargeable.
You should always select an account based on your specific needs, fees, and minimum balance maintenance needs.
2] Set a stock trading budget
When you are new to stock trading, it is advised to set a budget aside, which you can use for trading. Make sure this is a part of savings, but you have sufficient funds to meet your other needs even after deducting this. For beginners, it is best to start with a low amount, say 10% of the total monthly income. The other aspects that can be considered while setting the stock budget include:
- Only put money into investments that you can afford to lose.
- Don’t spend funds set aside for immediate, must-pay obligations like a down payment or tuition.
- If you don’t already have a strong emergency fund and 10 to 15% of your salary goes into a retirement savings account, reduce that 10%. In simpler terms, first set aside some savings that you can use in an emergency. Then from the rest of the amount separate the amount for trading. For beginners, a total of 10% of your excess after paying your bills, loans, savings, and other necessities is perfect.
3] Learn about different market orders
Once you have the stock trading account and have set aside the funds you plan to use for trading; it’s time to move ahead and learn about the market orders. This notion guides how you should buy or sell the stock to limit the possibility of losses. Again, there are two orders that you should know about:
- Market orders where you buy or sell as soon as you get the best price quote.
- Limit orders where you set an upper limit and lower limit which, when hit, the stock would be bought or sold immediately by the automated account.
4] Start with paper stock trading
Jumping right into the market with no experience is not a good choice. Rather, you should first start with some basic trades and then move ahead with the trading. The best thing to try out is paper trading. In simpler terms, start by picking up the stock of your choice and list down its price. Do a market analysis by following the trends for 2-3 weeks. Try to make analysis and future predictions for the stock price. Continue the same steps for around 3-5 stocks and once you are sure of the outcome based on analysis, start low with actual trading. Starting trading after practicing can help avoid losses that can occur in case of a lack of knowledge and skills.
5] Measure your returns with respective benchmark
How would you know you are succeeding? Stock trading is all about numbers, so you need to see measurable results to define your efforts as successful. In other terms, it would need you to set a benchmark against which you can analyze the results and see if you are moving in the right direction or not. This will also put your investing strategy to the test, and in case needed, you may change the same in the future if found inappropriate.
Suppose a serious investor cannot outperform the benchmark. In that case, it makes financial sense to invest in a low-cost index mutual fund or ETF, effectively a basket of companies whose performance roughly resembles that of one of the benchmark indexes.
6] Follow your strategy
The first thing to remember is that stock trading is not getting rich quick plan. It is one where you need to take time and have a proper focus to start with earning. Sometimes, you might hear rumors of some turnaround events happening in the market that can offer you a great return but make sure you do not fall for them. Following the investment strategy that you created for yourself is what you should do at first.
Finding the next big breakthrough stock before everyone else isn’t required to be a successful investor. Thousands of skilled traders have already heard that a stock is poised for a surge by the time you hear it, and the potential has likely already been priced into the stock. Even if it’s too late to earn a quick profit, that doesn’t imply you’re too late to the party.
7] Start trading with small amounts in the market
Never enter the stock market to start trading with a hefty amount. Rather start with smaller amounts so that it is manageable even if the loss occurs. Start with the surplus funds for you post completing your expenditure and savings. Also, remember that there is a way to gain the amount lost in the share market, but you don’t have to recover the same in the stipulated time. Rather, there are chances that you will need months or years to recover huge losses, or sometimes they end up as losses only. Diversifying and reducing the amount of investment in the market is thus the right decision to make.
8] Lower risk by building positions gradually
Slowly and steadily winning the race is true for share market trading too. Trading is not a get-rich-quick scheme. Buying slowly reduces an investor’s exposure to price volatility. According to Moore, high-dividend equities, which pay out a share of earnings to investors, and ETFs, which allow you to spread your risk over numerous companies, are also options.
You can also build your position by investing in various stock options. Unless backed by reputed sources and proof, do not fall for the HOT TIPS floating in the market.
9] Keep good records of accounts.
Last but not least is to maintain the records. Keep entering everyday trade in the book or a diary to ensure that you make no significant errors. When you have the record of daily transactions in your hand, you will be able to make a valid decision concerning which stock to purchase more and trade-in. Having the power to make such a decision is the leverage that will help you gain profits. Also, it will be an analysis of the strategy adopted by you in terms of whether it is correct. If not, you will be able to identify the points of change needed to have better trade positions in the future.
10] Invest from returns
After a certain point in time, you will have returns that you can use to make investments. At that time, you can put your savings in some other options like real estate or gold and use the funds retrieved from the share trading as profits for the investment. This way, you will be able to put all your funds to better use which will, in turn, generate better results for you.
Share trading is simple when done with proper understanding and by following the preparation steps. Jumping into the stock with the dream of becoming rich overnight is not the right decision. Rather investing in the stock market or trading in the stock market with some short or long-term goals in mind will help you to better strategize your deals. Make sure that you invest that part of the fund, which is idle in all ways. Avoid cutting your savings to a great extent that can suffer you in the future. Make a decision based on analysis and trends rather than following rumors or tips.
When followed while stock trading, simple steps can help you gain high profits, so follow the right steps and start successfully with stock trading.