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Before opening a trading account, it’s crucial to do your homework and grasp some fundamental concepts. As you begin to familiarise yourself with the basics of stock trading, there are several key terms and principles that are essential to understand. Building a solid foundation of this knowledge can help you make informed decisions and navigate the complexities of the market more effectively.
Table of Contents
Key Terms
1. Equity
Equity in the stock market represents the ownership of shares in a company. When you purchase shares, you acquire a proportional ownership stake in that company. The stock market is the platform where these shares (equity) are bought and sold among investors. The terms ‘stock’ and ‘equity’ are often used interchangeably.
2. Ask/Offer
The ask price or offer is the minimum price at which a seller is willing to part with a share of stock. It represents the lowest amount the seller will accept.
3. Bid
A bid is the highest price a buyer is willing to pay for a share of stock. If multiple buyers are interested, the bidding continues until the highest bid surpasses the others.
4. Spread
The spread is the difference between the bid and ask prices. In the stock market, this gap is influenced by supply and demand. Generally, the bid price is lower than the ask price, and the spread is a crucial indicator of market liquidity
5. Exchange
An exchange is a venue, either physical or electronic, where securities are traded. Examples include the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE).
6. Broker
A broker acts as an intermediary between investors and the exchange. They facilitate the buying and selling of stocks on behalf of investors in exchange for a commission.
7. Bull Market/Bear Market
These terms describe the overall trend of the stock market. A bull market is characterised by rising stock prices and an upward trend, while a bear market is marked by falling prices and a downward trend.
8. Trading Account
To trade stocks electronically, you need a trading account with a registered broker. This account allows you to execute buy and sell orders online.
9. Volatility
Volatility measures the rate at which a stock’s price fluctuates. High volatility means significant price movements, which can offer opportunities for profit but also come with higher risk. Conversely, low-volatility stocks are more stable and are often preferred for long-term investments.
10. Yield
Yield represents the return on investment for a stock, expressed as a percentage. It is a key metric for evaluating the profitability of an investment.
Key Concepts
Operating a trading account necessitates a basic understanding of several key concepts and processes. Here are the fundamental aspects you need to grasp:
1. Financial Markets
Acquaint yourself with the financial markets you intend to trade in, such as stocks, bonds, or futures and options. Gain insights into market participants, price movements, and the various factors that influence these markets.
2. Trading Terminology
Learn the commonly used trading terms like bid price, ask price, spread, volume, market order, limit order, stop-loss order, and others. This knowledge is crucial for effectively navigating the trading platform and communicating within the trading community.
3. Investment Goals and Strategies
Clearly define your investment goals, whether they involve long-term investing, day trading, swing trading, or other strategies. Assess your risk tolerance, preferred time horizon, and the types of securities or assets you want to trade.
4. Trading Platform
Get comfortable with the trading platform provided by your chosen brokerage. Understand how to place orders, navigate the platform, access market data and charts, set up a watchlist, and use any available research tools or features.
5. Types of Orders
Understand the different types of orders you can place, such as market orders, limit orders, stop orders, and trailing stop orders. Learn how to set prices, quantities, and time limits for executing trades.
6. Fundamental and Technical Analysis
Develop a grasp of fundamental analysis, which involves evaluating a company’s financial health, earnings, industry trends, and other factors that can influence the value of a security. Additionally, familiarise yourself with technical analysis, which uses charts, patterns, and indicators to predict price movements.
7. Research and Analysis
Stay informed with relevant news, market trends, and economic indicators that impact the securities you trade. Conduct thorough research and analysis to identify potential trading opportunities.
8. Trade Execution and Settlement
Understand the process of placing trades and how settlement works. Learn about trade confirmations, trade settlement periods, and the importance of timely trade execution.
9. Record Keeping and Analysis
Keep detailed records of your trades, including entry and exit points, trade rationale, and performance metrics. Regularly review your trading activities and analyse the results to identify strengths, weaknesses, and areas for improvement.
10. Risk Disclosure and Legal Considerations
Be aware of the risks involved in trading and understand any legal obligations associated with your trading account. Familiarise yourself with relevant regulations, account maintenance requirements, and tax implications.
Conclusion
Understanding these basic stock trading terms is the first step towards entering the world of stock market investing. With the considerable potential the stock market offers, all it takes is some research, preparation, and opening a trading account with a reliable brokerage firm like Share India to start investing.