Basics of Share Market -Stock Market Investing Basics for beginners.

The basics of share market on how to invest in stocks may initially seem to be a little puzzling for the first timers. If you are thinking of moving on to equity bandwagon as a first-time investor, I would strongly suggest for keeping in mind few important points of stock market investing basics for beginners discussed in this article. The uninitiated are usually alarmed by the professional terms used in the stock market. All it takes to overcome this is a bit of understanding the market and the stock market terms.

The stock exchange is a bid and auction market, where the price of particular scrip at any point is driven by demand and supply. It is a free market where nobody can influence the prices of the stocks. The beginners are usually daunted by stock market terms and jargon, trading methods and mechanics. But in actual, understanding the basics of share market and to know how the market functions are not a very difficult thing for the first timers. While the stock market terms like equity shares, debentures, preference shares, bonus and rights may sound like technical jargon, their meaning and investment functions can be easily mastered by the beginners. Let me now discuss some of the stock market investing basics for beginners which are important from the point of learning how to invest in stocks.

In the stock exchange there is a two way action – the bidders compete with each other to purchase shares at the lowest possible price. Simultaneously, those seeking to sell compete with each other to get the highest price for the shares they are offering. When the buyer and the seller agree on a figure a transaction is made. Before I go into other basics of share market let me define two most frequently used stock market terms, Brokers and Jobbers. A stock exchange is a market for dealing in securities. However, the investing public is not permitted to enter the trading floor to do business. The investor must, therefore, employ the services of a registered stock broker for buying or selling shares in a stock market. However, the brokers merely act as agents for their clients and deal with another class of stock exchange professionals known as jobbers. A client gives instructions to buy or sell to his broker, while the broker executes the order on the floor of the exchange through the jobber.

Buying or selling shares in stock market is not difficult for the beginners. The first thing to do as basics of share market is to select a registered stock broker or open a D-mat account with a broking agency, that will carryout the transactions on your behalf and complete all the formalities. The rest of the procedure may run as follows:

You have two options when instructing your broker to transact business,

a. You may tell him to buy or sell a scrip at a best ‘fixed rate’ and leave the matter to his judgement or,

b. You may specify reasonable price limits.

However, many times in case of price limits, the broker may not be able to execute the order as the share may not be traded in the specified limits. Too strict adherence to limits can result in an opportunity being missed, especially when the market is changing rapidly. In a bull market, therefore, as a stock market basics it is advisable to avoid strict buying limits if you want to ensure a purchase, otherwise you could be trailing a share for days together without buying it. Similarly in a bear market it is advisable to place selling orders at ‘market rates’. If you stick to a selling limit and the market plunges, you may lose an opportunity to sell your scrip that day. The next day, the price could be lower still.

One of the most crucial points about stock market investing basics for beginners is to know how to select scrip worthy of investment. The strategy is to pick out scrip for share market investment which have growth potential but are yet to get focus of the investors and are, therefore, under-priced. Therefore, going back to the basics of share market, the first step for stock Market Investing for beginners is to identify an industry or industries with growth potential and to study the fundamentals of various scrips under that ‘industry-group’. The main factors which influence the pricing of scrip under a particular industry group are its cash earning per share, net earning per share, gross profit margin, book value and its price earning ratio (P/E) compared to the composite P/E ratio of that industry-group, highest and lowest price of the scrip during the last one year and the quarterly and half yearly results. While a low P/E ratio of a scrip as compared to the industry-group’s composite P/E ratio may be the easiest technique for selecting a scrip worthy for investment, this may not be always enough to base your investment decision. Other factors play a part as well. Sometimes it is observed that a company despite having a low P/E ratio and sound management with growing curve did not achieve expected price appreciation as it was yet to catch the market’s attention. Going by basics of share market such scrip should prove a good buy, provided you are patient enough. If you are really interested in making a killing by investing in shares, pick up the shares of a particular industry which is not doing well right now but has potential to turn the corner in a year or two. The crucial factor here is the identification and buying of such scrips in their infancy for which it is essential to observe the equity indices of various industries. Understanding basics of share market can play a crucial role in such circumstances. If the equity index of an industry has either risen marginally or has remained stagnant or even declined, despite a growing trend in the market, it should be further investigated for investment consideration. Chances are you would get shares of companies in that industry at the lowest possible level. When it turns the corner, you can make a kill!

The next crucial factor about stock market investing basics for beginners is to decide when to buy the shares. While a study of the fundamentals can tell you the intrinsic strength of a company or industry, it can not convey the right time to buy its shares. For this you have to take the help of equity indices and price earning ratio. Of course, going by basics of share market there are a few ground rules in this regard. Investors should never enter the market in the middle of a bull phase. Once this phase has ended and the market has stabilized, start watching the movement of various equity indices from financial news papers. If you find minor ups and downs in the movement following the stabilized period, you can safely assume that there will be no further fall. This is when the investors start accumulating shares in small lots and various indices start rising. When the indices have risen by a convincing margin of 10 percent on an average, if you want to strike while the iron is hot, that is the ideal time to buy.

It is not as complicated as it sounds. If one goes by the basics, here are a few stock market tips for beginners on stock market investing, which will stand the first time investors in a good stead.

• Buy when others are selling and sell when others are buying. In short, go against the crowd;
• Sell at least 50 percent of your holding if the appreciation has been over 100 percent;
• Sell when the market has turned extremely volatile;
• Never back a weak horse. Never take a long position on weak scrip or a short position on a strong one;

Of course, aside from fundamentals and technical analysis, the instinct of the investor also counts in deciding the ideal time of purchase and sale. However, this is not possible for beginners. For this it requires understanding stock market thoroughly with years of practical knowledge of investment in shares. My other hub about How to make money in the stock market fast shows how ‘timing’ of purchase and sale plays a crucial role in stock investing.

In a nutshell, the stock market investing basics for beginners may seem a bit puzzling at the beginning but as the process of buying and selling comes within a methodical framework as per the basics of share market discussed in this article, it takes the uninitiated, little or no time to know the ropes of the equity world.

People who enjoyed reading this article will also enjoy reading other article about 'can you really make money taking online survey?'