Understanding the Stock Market: What is Trading? An Introduction to the Stock Market

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Understanding Stock Market: What is Online Trading?

The introduction of online trading has made investing convenient and accessible to all.

Online trading simply refers to trading of securities through an online platform. The online trading portals, like Angel One’s Speed Pro, facilitate the trading of various financial instruments such as equities, mutual funds, and commodities.

How to Trade Online?

To begin trading online you need to open an online trading and demat account with an online broking firm, which is a registered member of all the stock exchanges and certified by the SEBI.

Is it Safe to Trade Online?

While online trading is generally secure, there are risks associated with it. To enhance online trading safety, you must choose a reputable broker and secure your account using strong and unique passwords and enable two-factor authentication (2FA). Stay cautious of phishing emails and fraudulent schemes.

Benefits of Online Trading

  • Accessibility and Convenience
  • Lower Costs
  • Real-Time and Instant Access to Information
  • Greater Control over Trades

Things to Remember

  • Before rushing into trading, you must understand the functionalities of the stock market.
  • You should set your trading goals and know your risk tolerance.
  • You must research and compare various brokers and select the one that suits your needs.
  • You must plan your trades properly and avoid emotional decision-making.
  • Never invest more money than you can afford to lose.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

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Understanding the Stock Market: Types of Traders

Since the stock markets are open to all, lots of people are involved in trades and they buy and sell the assets based on their investment capacity and risk appetite. The trades are generally categorised into five types.

The Fundamental Trader

Those traders who focus on company-specific events and then determine which stocks to buy are known as fundamental traders. They rely on the buy-and-hold investment strategy and fundamentally analyse stocks and enter into traders after viewing both short and long-term perspectives.

The Noise Trader

These traders make their buying and selling decisions without considering the fundamental analysis or data specific to the company. The noise traders usually are short-term traders and aim to make profit from different economic trends.

The Sentiment Trader

These traders attempt to identify various trends before participating and prefer not to over or under-predict the market by investing in securities deemed profitable. Instead, they try to identify stocks that move with the market momentum and combine aspects of technical and fundamental analysis.

The Market Timer

A market timer is a trader who aims to predict the direction in which the security will move. These traders plan to make profit from the predicted movement. They are mainly long-term investors and typically look to technical indicators to guess the direction of the movement.

The Arbitrage Trader

An arbitrage trader is the one who buys and sells assets simultaneously, hoping to make profit from price differences of financial instruments that are similar. Such traders execute trades in different forms in different markets.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

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Understanding the Stock Market: How Does the Market Work?

The stock market is where investors can trade in different financial instruments, such as shares, bonds and derivatives. The two primary stock exchanges in India are the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Key Components of Stock Market

The key components or participants of a stock market include the companies (which list their shares), brokers, traders, and investors, all of whom must register with SEBI and the exchange before trading. SEBI is the market regulator tasked to ensure the smooth and transparent functioning of Indian stock.

Steps to Invest in Indian Stock Market

  • First a company will file a draft offer document with the SEBI.
  • On its approval, the company offers shares to investors through an IPO.
  • It then issues and allots shares to some or all investors who bid during the IPO.
  • The company’s shares are then listed on the stock market where they are traded.
  • Once a client provides instructions, brokers place the order on the market.
  • On matching a buyer and a seller, the trade is successfully executed.

Pricing Mechanism in Stock Market

The price of stocks is driven by demand and supply factors. A company’s share price depends partially on its market capitalisation value. Another way to calculate the fair price using the discounted cash flow method, that the fair price is equivalent to the total of all future dividend payments, discounted at present value.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

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Understanding the Stock Market: Retail Investors, HNIs, FIIs, and DIIs

An investor is the one who invests in stocks for a long duration. Based on the type of investment category, the investors can be classified into four broad types.

Retail Investors

A retail investor is a small investor and regular folk who invest in products in small amounts in expectation of decent returns. SEBI described a retail investor as anyone who applies to an IPO with an amount less than ₹2 lakh.

High-Net-Worth Individuals (HNIs)

HNIs are those who have investable assets worth over ₹2 crore. They have a separate category through which they may subscribe to IPOs. SEBI has bifurcated them into S-HNIs - investing ₹2-10 lakhs - and larger HNIs - exceeding ₹10 lakhs.

Domestic Institutional Investors (DIIs)

It refers to institutions that are based in India and invest in the country itself. There are different classes of DIIs which participate in the stock market, for example an asset management company that pools money from a large number of individual investors and invests it across sectors and insurance companies, financial instruments and pension funds.

Foreign Institutional Investors (FIIs)

The FIIs are investment institutions which are based outside India and invest in Indian markets. Due to the enormous size of their investments, the FIIs can impact the overall economic health and sentiment of the market. It is considered a positive and hints confidence in the nation’s growth story when more and more FIIs invest.

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Understanding the Stock Market: Key Terms

It is important to know the key stock market terms if you want to understand the stock market. Here are the important terms that you should know.

Stock

A stock is like a share of a company that you can buy or sell.

Share Market

It is a platform where buyers and sellers come together to trade publicly listed shares of companies.

SEBI

Securities and Exchange Board of India is a regulatory body which oversees the functioning of stock exchanges and ensures that listed companies comply with regulations and disclosure requirements.

Demat Account

It is an electronic account used to hold, trade, and manage shares and securities in digital form, eliminating the need for physical share certificates.

Bull Market

A market characterised by rising stock prices, usually associated with investor optimism.

Bear Market

A market characterised by falling stock prices, usually associated with investor pessimism.

Market Capitalisation

The total value of a company’s outstanding shares.

IPO

The first sale of a company’s stock to the public.

Broker

A person or firm facilitating stock trades for investors.

P/E Ratio

A ratio comparing a stock’s price to its earnings per share, indicating its valuation.

Index

A benchmark representing a group of stocks used to measure market performance.

Resistance Level

A price point at which a stock typically faces selling pressure.

Support Level

A price point at which a stock typically experiences buying interest.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.