Equity Trading in India: A Detailed Guide for Beginners

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Equity Trading

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Equity Trading in India has been a trending topic among investors and people looking to multiply their earnings by putting in their money for higher ROIs. Equity trading, sometimes also referred to as stock trading, refers to the act of buying and selling stocks of one or more companies listed on a major stock exchange.

Equity orders can be placed by using a Demat or brokerage account via a broker (broking agent or stock market agent.

How does Equity Trading work?
Trading Equities through smartphone

Back in time, trading and execution of orders were conducted in-person with investors calling orders into brokerage firms that would then flow down to the trading floor. However, technology changed things and made trading accessible to everyone across the world through the power of the internet.

Easy-to-understand and use platforms have emerged that allow investors to place orders while also providing access to various charts, tools, and suggestions. 

Nowadays, anyone who wants to trade can open a demat account with a broker and start trading. Most brokers offer their services online and in the past few years discount brokers have taken over from the established full-service brokers as they offer their products at a discount.

How to open a Demat Account in India?

Opening a Demat account is easy, you just need to provide the below documents as proof:

  • PAN Card
  • Address Proof
  • Identity Proof

Open Account and Start Trading

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But before you open an account with a broker, it is important to conduct proper research into the broker you want to open an account with. You can read up Best Broker India’s blog on the Top 10 Brokers in India. We have also prepared reviews on the best full-service and discount brokers in India. Here is a list on the same:

Best Full-Service Brokers in India:

Best Discount Brokers in India:

Other Types of Trading

While equity is one of the most widely-used and popular forms of trading, this is not the only type where investors put in their money for handsome returns. Here’s a brief description of other trading types available:

Commodity 
Commodity Trading

Commodity refers to products such as sugar, wheat, coffee, cotton, and other items like gold, silver, copper, and zinc. Concerning stock market trading, various commodities are traded on exchanges including copper, cobalt, gold silver, coffee, and corn among others.

However, this doesn’t refer to any physical trading of these items but through futures & forward contracts only. And the values agreed upon in contracts during buying and selling of these contracts result in the profit/loss for the investors.

Equity Derivatives

Derivatives are a type of financial instruments, which derive their price/performance from the underlying assets. While the derivative is also termed as a contract of agreement between the 2 parties, an asset can be a stock, share, currency, commodity, or interest rate.

Some of the most common derivatives are futures & options while others include options, swaps, warrants, exchange-traded funds, and more. The most common uses of derivatives are earning by speculating the stock movement and hedging purpose.

Currency 
Currency Exchange Global Foreign Money Finance

Similar to the commodity market, investors in the Currency Market buy and sell different currencies from around the world. The value of different currencies being traded is measured in comparison to that of the dollar’s value.

Some of the common participants of this market segment include central banks, corporations, investors, retail forex brokers, and investment management firms.

Mutual Funds 

Though mutual funds work in a similar fashion to that of equity shares and move up/down with the market, a major difference lies in the investment strategy.

Mutual funds are referred to as pooled investments wherein the investor’s money is put into a selective list of bonds or shares, curated to minimize overall risk.

Correlation of Equity Trading with Other Types of Trading

The trading market can be big and confusing for newcomers while overwhelming for a keen investor. With different types of indexes, categories, and types of stocks, understanding these different types of trading segments and their correlation helps make smarter trading decisions.

While all these 4 markets move together, some go in the same direction and others move opposite.

A rise in commodity prices means an increase in the cost of goods. This comes as an inflationary action and is reflected through an upward movement of interest rates. This leads to an inverse reaction in bond prices, causing their prices to fall. Stocks, on the other hand, are correlated to bonds and follow the same suit. This can be justified by the inflation-led rise in the cost of doing business.

Movements in currency pricing are known to cause a direct impact on commodity prices, which go in the opposite direction to that of the US dollar. And, the effect on commodity pricing reflects in other types of markets.

Equity vs Mutual Funds

Though fluctuations in the value of equities and mutual funds are based on the market movers, fundamental differences between the two lie in terms of risk, returns, volatility, and other factors. While mutual funds are considered to be an ideal solution for low-risk investors with a decent return, equity trading brings a potential of extremely high returns along with high risks as well. Further, investing in a single stock makes equities more volatile than mutual funds that put in investors’ money into multiple stocks.

 Trading Equities in India

Trading in India has gained hype in recent years with indices having grown significantly in the near past with a huge potential expected in the future. While this has attracted investors of different types, from small to large scale, low to high-risk profiles, and others. However, to get started with trading, all you need is a trading + Demat account and basic knowledge of stock/equity market and trading process.

Follow these steps to start trading equities in India:

  •  Before beginning, check if you own a PAN card and Aadhar card as these are mandatory documents among others to open an account.
  •  Find a broker with the best offer and apply for the opening of Demat account.
  •  For opening a Demat account, the broker might ask for documents including a canceled cheque, a photograph, and a signature (digital copy if you are opening an account online)
  • Add the money to your Demat account and start trading if you have a list of preferred stocks to invest.
  • In case you don’t know which stocks to invest in, you can check for suggestions from experts or hire an investment advisor from the broker.

In case you wish to develop an understanding of the equity market, you should explore these 2 types of analysis investors use.

Fundamental vs Technical Analysis
Fundamental Analysis 
Fundamental Analysis Steps

Before buying any company’s share, you should evaluate the organization’s financial position through publicly available documents. You can do the required analysis by thoroughly studying and comparing financial statements such as income statements, retained earnings, balance sheet, and cash flow statements. Equity traders also look at the quick ratio, profit margins, and receivables before investing.

Technical Analysis 
Holding technical analysis hands
Use charts to do technical analysis

A deeper evaluation method, technical analysis is preferred by experienced investors for making informed decisions. This involves a detailed analysis of a stock using one (or multiple) professional charts and calculations like statistics, volumes, past data, correlation, regressions, and others. You can find a variety of technical tools online or with your broker.

Learn more about various indicators for technical analysis

Conclusion

Thus, having this much knowledge about trading can help you get started with investing and earning from the stock market. However, before investing you should choose the right type of market to invest in, get an account opened with a reputable broker, and develop an understanding of the market and analysis tools to ensure better returns.

Always keep in mind that its important to perform thorough analysis before deciding to trade in equities and don’t rely on other people’s analysis to become profitable in the long run as it is not always in the best interests to make others profitable.

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