If yes, then you are in the right place. Because in this article, I am going to tell you about the share market and how it functions. What is investment, what is trading, how to invest, how to trade, and also the entire concept of the share market. By the end of this article, you will have a clear idea about the share market.
Before understanding what the share market is, we all know what a marketplace is. A market is where vendors sell their products and consumers buy from them. If the consumer is not satisfied with the price or quality of a product, they will buy it from another seller. With this basic understanding, we will understand what the share market is.
The share market is the place where companies (vendors) sell their shares (products) to investors (consumers). But why do companies sell their shares to investors? Because they need money for their future projects, business improvements, etc. We all know we should pay so much interest to the bank if we borrow money from them. So, the share market is an alternate source for the company to get money for their investment.
By selling you their shares, they accept you as a partner of their company until you sell that share. Since you become part of that company, you will get a profit whenever the company makes a profit, and your money will be lost when the company faces losses.
Now we all know that companies are selling their shares to investors who are willing to invest in a particular company. Because they will get money for their investment for the future of their company. But how does this process work?
Companies will list their stocks on stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India. If you want to buy some shares of a company, you need a stockbroker. But why do we need a stockbroker? Because we cannot directly buy a stock from NSE or BSE as there are so many companies listed in the share market and millions of people buying and selling their stocks every day.
So as a single organization, it is very hard to build such infrastructure, and it is very challenging for the stock exchanges to maintain accurate data. That’s where the broker comes in. If you need to buy a stock, you should approach a broker and ask them to buy a stock. Then the broker approaches the stock exchange to buy the stock for you if there is a matching seller.
It may seem like a tedious process, but when you place an order in a broker account, the order will get executed in a fraction of seconds, that’s how it is automated. So if you want to enter into the share market, you must need a Demat account from any one of the stockbrokers. Many brokers provide you with free accounts, and you can google them and open an account with a stockbroker. The account opening process is usually done in minutes.
There are two types of business are available in share market. 1. Investing, 2. Trading.
Investors can be divided in to three categories. 1. Foreign Investment institutions(FII), 2. Domestic Investment Institutions (DII) 3. Retail Investors.
Traders can be divided in to two categories 1. Retail Traders, 2. Corporate traders(operators)
Investment is essentially becoming a partner of a company. When you have confidence in a company's performance, you invest your money in that company. Over the course of 3 or even 5 years, if the company consistently generates profit, you will earn dividends and consistent profits from that company until you decide to sell the stock. This process is commonly referred to as investing.
Trading is the process where you buy a stock in a particular company and keep it for a short period of time, selling it when you make a profit. Traders typically sell their stocks within a week or two, with some engaging in intraday trading where they buy and sell a stock within a single day. Traders do not wait for 3 or 5 years to make profits. Instead, they execute more trades over shorter periods, aiming to earn profits quickly.
Selecting the perfect stock for investment is not as easy as it may seem. If it were easy, everyone would be wealthy. Therefore, it’s crucial to conduct thorough research on the company you plan to invest in.
Researching and gathering relevant information about a stock, and analyzing it, is known as fundamental analysis. Before making any investment, it’s essential to have a comprehensive understanding of the company you’re considering investing in.
There are numerous methods to conduct fundamental analysis, with some basic approaches including:
1. Analyzing the global and national economy.
2. Assessing the performance of the sector.
3. Evaluating the reputation of the company.
4. Reviewing the company’s past performances.
These are just a few of the factors to consider before making any investment decisions.
Trading can be categorised in to 3 types.
Intraday trading is also knows as day trading. Which means you should buy and sell the stocks within that day. In other words, you should start the day with zero shares and should end the day with zero shares.
Usually brokers will give you 4times leverage when you put and intraday order. Which means if you have Rs 10000, you can trade upto Rs 40000. So it will give you more profit and if you made a wrong decision, it will give you a big loss too.
But How much money an Intraday trader will make? Let’s do a calculation.
We have Rs 10000 in our trading account. We saw a stock xyz trading at Rs 100 per share. Since we have 4x leverage, we can trade upto Rs 40000. So we can get 400 shares with that amount.
Once you made an entry into the market, let’s assume the stock price increasing by one percent and you are selling it at Rs 101 which means, you will get Rs 400 profit that is which means you got 4% of profit from your initial investment of Rs 10,000.
Just imagine you are doing this everyday, you will become rich within a year. But on the other hand, if the stock price goes down to Rs 99, you will lose 4% of your money. So it is very risky. A study told more than 95% of intraday traders ended up losing money on the long term.
Swing trading means a trader will not sell the stock within a day like intraday traders. Swing traders will buy a share and hold it for some days or even some weeks. They will trade on a technically and fundamentally strong stocks and wait or a huge swing to happen like 6% or more. Once they got their swings they will sell their stocks and book profits.
To do swing trading, you should use some indicators like SMA, EMA etc and also you should be technically strong. Because swing trading also risky if you did without enough knowledge
Positional trading is similar to the swing trading but they will wait for the stock price to come down to make entry. Positional traders usually chooses 10-15 stocks and watch it closely everyday and once the share price comes down, they will buy the shares and hold that position.
They will hold that position or months and wait for multiple swings to happen and aim for more than 8% of profit and then they will sell it. To do positional trading, you must need so much patience and decision making ability.
At the beginning of the article, I have mentioned there are Foreign Investment Institutions(FII), Domestic Investment Institutions(DII) are investing along with retain investors. Also operators are trading along with traders. Which means those corporate companies and the institutional investors are making profits.
Since the corporate companies are playing in the market with millions of dollars, retail traders and investors will not have a chance to compete against them and this is the most important reason why 95% of retail investors failed. Only the 5% who are smart people make profits in share market.
Another important reason is most of the people are very skilful but also vey emotional so they will make wrong decisions. Some people are not so emotional but they don’t have much skills. Some people will invest without much knowledge about the companies and there are so many reasons for the people to make wrong decisions.
On the other hand corporate traders and investors are very well trained professionals who are doing this for decades. So they will know the exact point when to buy and when to sell. Since they are corporate companies, it is obvious that they will have link with other corporate companies which means they will get exclusive news much faster than the public.
These are the main factors why most of the people ended up loss in share market.
If you choose your career in investing, you should read news paper daily and you must know about the world economy and how well the each sector is performing in your country. As a personal advice, you should aim for the long term investment instead of short term. Create a portfolio. Add companies from different sectors.
Give priority to companies who are dealing with Green energy, Electric vehicles etc and conduct a proper research about the company. Learn to wait. Because that is the most important skill you must develop.
If you choose your career in trading, you must concentrate on yourself. You should develop skills like emotion control, ability to make decision under pressure, smart thinking, attention to detail etc.
As a personal advice, I would strongly recommend you to do some paper trading and back testing by putting a very small amount like Rs 1000. You must do paper trading for at least 3 months to know the advantages and disadvantages in your strategy.
Share market is not a rocket science. In fact it is a very easy concept to understand but the problem is we have to be so much skilful to compete against the corporate investors and operators. There was famous proverb called “Practice makes Perfect” which is ideally suitable in this field.
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