Indian Stock Market Basics for Novices

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Informal trading of shares of banks and cotton presses was being done in India since the 18th century. However, it was in 1875 when the first formal institution for share trading, the Bombay Stock Exchange, was established. It was recognized as the first stock exchange of the country under the Securities Contracts (Regulation) Act in 1956.

As share trading activity grew, the Sensitivity Index or the Sensex was created in 1986. The National Stock Exchange, the first electronic share market in India was established in 1992, and quickly became the largest and most-preferred platform for traders and investors alike. All stock markets in India are regulated by the Securities and Exchange Board of India (SEBI, which was established in 1988. Today, investors can participate in debt, equity and futures market depending on their investment strategy and risk preferences.

Making your First Buy and Sell Trades

The stock exchange acts as the intermediary between buyers and sellers of shares and securities. A country-wide network of registered brokers and sub brokers receive instructions from clients and transmit orders, which are then settled on the exchange. In the past, orders were placed in person or over the telephone.

Today, one just needs a demat account, a trading account and an online trading program to take investment decisions through a computer, laptop or even a smartphone app. While the procedure for buying and selling shares is simple, knowing when to buy, hold or exit investments can be a complicated exercise, especially for novice investors. Read ahead for some useful “how-tos” that will make it easier for you to have a safe and profitable investing experience.

1. How to Choose the Right Stock

Will the banking sector outperform the Index over the next five years? Will IT sustain its past good performance? Should you invest in Infosys, TCS or both? The act of buying shares is a small part of your investment decision. For a serious investor, research is a continuous activity. Keep learning, keep analyzing and keep researching to become a better investor.

2. How to Enter the Market

Amateur investors make the mistake of deploying their funds all at once. If you are working with a ten-year timeframe, then you can afford to buy shares every few months. This will help you assess the efficacy of your strategy, average your purchase price and exit investments where stop losses have been hit.

3. How to Minimize Losses

It is a misconception that investors don’t need stop losses. Buying a blue-chip at a premium and waiting for years just to recover your investment does not make sense. Consider micro and macro factors and determine your stop losses accordingly.

4. How to Mitigate Risks

As a long-term investor, you must look beyond short-term factors like depreciation of the rupee or temporary spikes in oil prices. This is why you should safeguard your investments by combining aggressive bets with investment in defensive sectors like FMCG and pharmaceuticals. Analyze your options and create a diversified portfolio to ensure your investment is safe.

5. How to Handle Market Crashes

A 700-point cut on the Sensex in a single day can seem like a disastrous event for a trader. For an investor with a 5-year timeframe, a one-day loss is of very little significance. Your decisions should be based on market fundamentals and not on market sentiments. A smart investor should use volatility to purchase quality companies at a significant discount.

Investing in equity is not a get-rich-quickly scheme. It is a long-term exercise that requires knowledge, discipline and patience. As a novice, adopt the slow-and-steady approach to ensure you earn sustainable and attractive returns on your investments.

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