The Basics of Stock Market

Despite its popularity in the news today and the possibility of earning lucrative returns, investing in the stock market can seem like a rather formidable activity. Stock markets are a great way of diversifying your portfolio beyond fixed deposits, gold and mutual funds.

While it is true that investing in the stock market is one of the best ways of generating long-term wealth, it also accompanies market risk. By effectively managing your risk tolerance, investing in stocks can become key to maximizing your investments.

Let’s break down the very basics of the stock market:

Open a demat and trading account

The first thing that you need to do as an investor is open a trading account. A trading account allows you to execute trades on various securities. Whether you want to buy securities, buy futures & options (F&O) or make your money through intraday trading, a trading account is essential. Additionally, you would also need to open a Demat account, to trade seamlessly and conveniently.

It is important that the trading/depository partner you choose offers you competitive brokerage rates, back-end support, technical efficiency and expert advice.

Stop loss and target price

Once you have opened your trading account, you are ready to begin trading. Before you place a buy order for any stocks, be sure to zero in on stop loss. Simply put, a stop-loss specifies that a particular share should be sold once it breaches a predetermined limit.

Losses are an everyday reality on the stock market - it is imperative that you acknowledge and mitigate potential losses. A stop loss order, which you set with your broker before a buy or sell, minimizes your risk. A key differentiation to be noted here is that a stop loss does not avoid losses altogether but keeps risks within a limit that you deem sustainable. It is similarly important to set a logical target price based on research of how the stocks prices have risen and fallen in the recent past.

For example, let’s assume you have purchased shares at Rs 110 per share. You set your target price at 112 per share. You must acknowledge that the price can either rise to Rs 112 or more, or even dive to Rs 105 or less. As a result, you could set your stop loss at Rs 108. That way, should the stock price fall, you take a hit of only Rs 2 per share. Your broker will automatically sell your shares if the price dips to Rs 108.

Technical charts and indicators

To arrive at the right stop loss and target price, you will need to have a very precise understanding of how a given stock's price has performed during different times of day and on different days. You should observe the technical charts and indicators of a stock for a few weeks before buying

On the IIFL website, you can browse, view and study these charts live, to arrive at well-informed trading decisions.

Additionally, allocate some time on a daily or at least on a weekly basis to scale up your know-how. Read articles and visit forums that give you stock advice and tips. Be sure to analyse all the literature and expert guidance communication that comes in from your broker.

The right psyche

When you can reap a ton of profits, even the best of us find it challenging to not get carried away. However, getting carried away while trading on the stock market can cost you actual money. Before beginning, conduct research and experiments to test the waters.

If you choose to conduct an intraday trading experiment, to understand the workings of the market, choose a time of day that suits you. Once you have chosen a particular time of day, stay consistent to that time. It is also vital to keep your emotions at bay with trading. You must rely on logic and research facts and figures.