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Stock Trading Basics

Stock Trading Basics

The stock trading activity begins with opening a trading account with a broker. You also need to open a demat account if you intend to trade in equities. Once the account is verified by your broker a trading code is allocated to the client and they can start buying and selling shares in the trading account. Every trading account is linked to a bank account and to a demat account. All debits and credits of funds and shares will happen in that particular bank account and demat account only. You can place stock trading orders either offline or online on the internet.

Five basic things to know about stock trading

  • In the market there are broadly traders and investors. The traders look for short term opportunities in the stock market while the investors look for long term wealth creation opportunities. Traders look to churn their money more often while investors prefer to buy a stock and hold it for a long time before selling.
  • To trade, you have to first place an order on the trading terminal. Either your broker can place it for you or you can yourself place it on the internet trading terminal. The order specifies which stock you want to buy or sell in how much quantity and at what price. Once the order is executed it becomes a trade and it is a contract between the broker and the trader.
  • Stock trading can result in profits or in losses. If you sell a stock at less than purchase price it results in losses. If you sell the stock at above the purchase then it results in profit. While profits increase your trading account balance, losses reduce your trading account balance. Profits earned on stock trading are taxable at the end of the year.
  • When you trade stocks there is a cost involved. You are required to pay brokerage to the broker for executing the transaction. Then there are statutory charges. The government charges you securities transaction tax, GST and stamp duty. You also need to pay SEBI Turnover fee and exchange charges. All these costs are mentioned in detail in the contract note.
  • When you trade stocks you need to pay margin. If you are taking delivery then you need to pay the full amount upfront. If you are buying specifically for intraday trading then the broker will allow you leverage of 5-6 times and you can trade much more with the funds that you have. Even in trading in futures and options, margins are payable to the exchange.

Three interesting things you need to know about stock trading

The stock exchanges have made stock trading a much safer and surer game. The institutional mechanism reduces your risk a lot.

  • When you trade stocks, all your trades are guaranteed. That means; even if the other party defaults the exchange will take it upon itself to honour the transaction on behalf of the defaulter so that you are not put to any trouble. These losses will later be recovered from the defaulter but for the genuine trader, there is no risk of trading on the exchange.
  • The exchanges collect a variety of margins to curb the risk in the market. There is initial margin, then there are special margins and in case of futures and options there are also mark-to-market margins that take care of daily risk of price volatility.
  • Exchanges also use other measures to curb risk in stock trading. Very volatile stocks are transferred do the T2T segment. Circuit filters are reduced from 20% to 5% in case of volatile stocks. The idea is to have a second level of defence mechanism for stock trading.
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"Prevent Unauthorized transactions in your Trading/Demat Account --> Update your mobile numbers/email IDs with your stock brokers/Depository Participant. Receive alerts/information of your transaction/all debit and other important transactions in your Trading/ Demat Account directly from Exchange/CDSL at the end of the day .......... Issued in the interest of investors." | "KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary." | "No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorize your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account." |"Investment in Securities Market/Commodity Market is subject to Market Risk. | RGESS investors kindly download New Retail Investor Certificate from link - https://www.cdslindia.com/investors/rgessverification.aspx | Dear Investor kindly update Aadhar Number with your demat account, contact your nearest branch."
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