Before taking the first step in trading, you need to get a basic idea about the different sectors
The thought of participating in stock market trading is often frightening for those who want to enter the market. There is trading strategy, position-sizing, risk management and much more. Today, with the advancement of technology and easy access to data, you can easily get the right understanding of all this. However, before hopping on a stock market trading bandwagon, you must have a basic knowledge of the stock market and its functions.
Understanding the stock market
Also known as equity, stocks represent the ownership of a fraction in a company. A stock market is a public market where investors can buy and sell ownership of such stocks. Investable assets can be purchased and sold on the exchange through a broker. Companies get capital through the stock market and investors get a chance to share in the profits of publicly traded companies.
Once you understand the stock market, the next is the stock market index. A stock market index is a collection of different stocks belonging to a particular category. There are some sectoral indicators that represent stocks in a particular sector and volatility indicators indicate relative volatility in the market. Stock market indicators enable you to analyze the overall performance of the market.
Demat account opened
After gaining sufficient knowledge about stock market and stock market indicators, you can open your demat account to start trading. A demat account is a dematerialized account for keeping records of financial securities like stocks, bonds etc. in electronic form. On the other hand, you open a trading account with a broker to buy and sell securities.
Understanding the sector
Before taking the first step in trading, you need to get a basic idea about the different sectors. Each company belongs to a specific sector like IT, FMCG, Utilities, Media etc. It is important to gain knowledge about the sector in order to understand which sector will be profitable to invest in. Once you make a list of profitable sectors, you will see profitable companies in the same sector.
The importance of technical analysis
Technical analysis is important for profitable trading. It is a way of understanding market behavior by analyzing charts and chart patterns. A chart pattern chart presents historical information of a company in a systematic way. In the chart, the information is presented with candles. They represent four parts of value – open, high, low and closed. A green candlestick shows the closing price of the stock, which is higher than its opening price, and a red candlestick shows that the opening price of a candle is higher than the closing price. To trade successfully, one must master the art of reading charts and patterns.
Finally, once you gain information about analyzing the market using charts, the most important part of trading is risk management and capital allocation. When trading, you need to understand the risks and not make an emotional decision before putting your money on the table. You need to analyze the potential losses from the investment and take appropriate action to minimize the chances of any losses. Risk management is an important part of the strategies used by traders during trading.