Beginner’s Guide: Understanding the Basics of Trading

If you’re just a beginner in stock trading, then you must know about all the basics of the stock market. With the right support and knowledge, you’ll be able to handle this adventure of the trading world. This beginner’s guide will help you understand the stock market, give you a solid basis for starting your trading journey, and address all the queries related to “how to learn trading for beginners”. This blog will explore everything from the primary and secondary markets to stock quotes, bids, and asks in our all-encompassing manual aimed at providing you with all the tools necessary for making informed decisions in trading.

Understanding the Stock Market

Before we get to know more about stock trading, it is important that we take a look at the two main types of markets i.e. primary market and secondary market.

1. Primary Market

The primary market is where companies issue new securities, such as stocks or bonds, and offer them to the public for the first time. This process is known as an Initial Public Offering (IPO). When a company goes public, it raises capital by selling shares to investors. The primary market facilitates the initial sale of securities, allowing companies to raise funds for expansion, debt repayment, or other business purposes.

New securities are stocks or bonds issued by companies and offered to the public for the first time, referred to as the primary market. This process is called an Initial Public Offering (IPO). Here, a company goes public, where it sells shares to raise capital from investors. Since this market facilitates the initial sale of securities, it allows the companies to raise money for expansion and debt repayment or help for other business purposes.

2. Secondary Market

On the other hand,  the secondary market allows investors to buy and sell previously issued securities. This market is facilitated by stock exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). In the secondary market, transactions occur between buyers and sellers, with stock exchanges or brokers acting as intermediaries.

Stock Trading Basics

Now that you understand the primary and secondary markets let’s begin with understanding the fundamentals of stock trading.

1. Opening a Demat Account

To be involved in the stock market as a buyer or a seller, you need to have a demat account. This account works like a bank for keeping your shares in electronic form and carrying out trade through them. No stock can be bought or sold without this account.

2. Understanding Stock Quotes

Stock prices keep on changing due to several reasons such as supply and demand levels, economic fluctuations, company earnings reports as well as trader sentiment. Understanding these factors will help you know why stock quotes go up or down, which can guide you when to enter into trades and when to get out of them.

3. Bids and Asks

When trading in stocks, bid and ask are the two words frequently used terms that one might get to hear. A bid price stands for the highest amount that someone is ready to pay for a share, while an asks (or selling) price is the minimum at which the seller is willing to accept shares. To be successful in trading stocks, one should know what bid/ask spread means and be able to calculate profitable bid or ask prices.

4. Fundamental and Technical Analysis

Successful stock trading involves analysing a stock from both fundamental and technical perspectives.

Fundamental analysis is performed on stocks to find out their intrinsic value. This is done by looking at various factors such as the company’s earnings, expenses, assets, liabilities, and general financial health. The purpose of this analysis is to determine whether a stock is undervalued or overvalued based on its fundamentals.

On the other hand, technical analysis deals with forecasting future price movements based on past price and volume trends. Charts, indicators, and other technical tools are used to identify potential trading opportunities under this method.

5. Setting Stop Losses

Since volatility is an inherent feature of the stock market, beginners need to control the risks involved in trading. Setting stop-loss orders can be an effective way of doing this. A stop-loss order refers to a predetermined price at which you will exit a trade which might save you from experiencing loss in trading, in case the market moves against your position.

6. Seeking Expert Advice

While learning and practising are crucial, seeking advice from experienced traders or financial advisors can be invaluable, especially for beginner trdaers. Professionals can offer useful tips, guidance, and training that might help you to make sound trading decisions.

7. Starting with Less Volatile Stocks

It is recommended that beginners should start with stocks which are less volatile. Such stocks have smaller price fluctuations and are less likely to have rapid price changes, making them better for acquiring skills and confidence before trying out more volatile markets.

Understanding the Basics of Stock Market with an Example

Let us take an example to explain how stock trading wprks. Suppose you want to invest in the shares of a company called ABC Ltd which are listed on NSE and are currently trading at INR 100 each.

You open a Demat account with any broking company and also provide the necessary funds in your trading account. Having done this, you may now purchase 100 such stocks at INR 100 per share after studying their fundamentals as well as technical indicators.

The buying order will be generated by your broker for 100 shares at INR 100 being the ask price. Once the order is placed, your Demat account will reflect the ownership of 100 shares of ABC Ltd.  If they go up to INR 110 each later on and then decide to sell them off again; all you need do is instruct the broker to sell at the bid price of INR 110. Upon successful execution of the sell order, the proceeds (₹11,000) will be credited to your trading account, reflecting a profit of ₹1,000 (excluding brokerage fees and other charges).

However, if the stock price falls to ₹90 per share and you choose to exit your position, your broker will place a sell order at the bid price of ₹90. In this case, you would incur a loss of ₹1,000 (excluding brokerage fees and other charges).

But if the stock price drops to INR 90 per share and you decide to sell, your broker will put in a sell order at the bid price of INR 90. In this case, you would experience a loss of INR 1,000 (excluding brokerage charges and other fees).

This illustration shows how stock trading works at its simplest level: buying when prices are low or selling when they’re high. It also shows how much money can be made or lost based on price movements.

Conclusion 

Starting your journey in stock trading can be exciting and difficult at the same time. As a beginner in the field, it is important to know the basic concepts of primary and secondary markets, stock quotes, bids/asks, fundamental analysis, and technical analysis, and seek professional help so as to have an easier space to understand trading. 

If you are looking forward to starting trading, then probably Kotak Securities’ would be suitable for you, being a beginner-friendly platform which is also reliable enough for any level trader. They have made available detailed research on stocks/mutual funds/other financial products together with their expert guidance which are essential tools that can enable one to make well-informed decisions when investing in different companies’ shares through this medium. Furthermore, Kotak Securities’ neo offers an all-in-one trading solution where individuals can buy or sell securities such as equity shares, debentures, bonds, options futures, etc.