scorecardresearchBeginner’s guide to share trading

Beginner’s guide to share trading

Updated: 17 Mar 2022, 11:12 PM IST

To start trading, you must be well acquainted with the basics of investment. Read further to know these in detail

Investing in the stock market is the most common way for novices to get investment experience.

Investing in the stock market is the most common way for novices to get investment experience.

Investing is a way of making money as long as you live and have the money work for you to completely reap the rewards of your labour in the future. Investment is defined by legendary investor Warren Buffett as “the process of setting the money now to receive additional money.” The aim is to put your money into one or more types of investment vehicles to let it grow over time.

Whether you can spare 1,000 a month for investment or have a small amount of savings, you can start as an investor. Let us show you how you can maximise your returns while minimising your costs.

What kind of investor are you?

You have to answer the question before you commit your money -What kind of investor am I? When you open a brokerage account, an online broker will ask you about your investment objectives and what risk levels you are prepared to take.

Some investors desire to play an active role in controlling the growth of their money and some prefer to “set it and forget it.” You can invest in stocks, bonds, exchange-traded fund (ETFs), index funds and mutual funds, more “conventional” online brokers, including those above stated.

Online brokers

Full-service brokers provide the complete spectrum of traditional services, including retirement, healthcare and money-oriented financial advice. Normally they handle only high net worth individuals (HNIs) and can demand a huge fee, such as a percentage of your transactions, a percentage of your assets and an annual membership fee at times.

The minimum account limit of Rs.25,000 and more at full-service brokerage are standard. Nevertheless, traditional brokers justify their high fees with extensive advice on your needs.

The exception was formerly the discount broker, but it’s the standard now. Discount internet brokers provide you with facilities to pick and place your own transactions and many also offer a robot consultation service. In the twenty-first century, financial services operators have introduced other features, including training material on their websites and mobile apps.

Also, while there are several discount brokers who have no minimum (or extremely low) deposit limits, you may face other limitations and certain charges will be levied on an account that does not have a minimum deposit. If investors wish to invest in stocks, an investor should take this into consideration.

Minimum amount to opening an account

There is a minimum deposit requirement for many banking institutions. In other words, until you deposit a particular amount of money, they won't accept your account application.

It is worth shopping around and reviewing our broker reviews before determining which account you wish to open. At the start of each review, we list minimum deposits. In some companies, minimum deposits are not required. Other costs may fall if you have a balance above a specific threshold such as trading costs and accounts administration fees. However, others could still offer a number of non-committal trades to start an account.

Commission and Fees

There ain’t no such thing as a free lunch as economists like to assert. While many dealers recently have tried to cut trading commissions, and ETFs offer index investments for all those who can trade a bare-bone brokerage account, all brokers are required to gain money one way or the other from their consumers.

In most circumstances, each time you buy or sell an inventory, your broker charges a commission. Some brokers do not charge commercial fees, but in other ways they do. There are no charities running brokerage services.

These fees might add up and affect your profitability, depending on how often you trade. If you regularly get into and out of positions, investing in stocks may be highly expensive, particularly with little money available for investment.

Please note that trade is an order for one business to buy or sell shares. You are charged five distinct shares if you want to buy five different stocks at the same time. These are considered five independent shops.

Now, say you choose to buy your 1,000 from the stocks of those five companies. To do so, you will incur 50 rupees of trade – if the fee amounts to 10 rupees– which is equivalent to 5% of your 1000 rupees. If you had to totally invest 1,000 rupees, after trading, your account would fall to 950 rupees. This means a 5% loss before you even get a chance to earn your investment.

If these five inventories were to be sold, you would suffer the cost of the deal, which would be an additional Rs.50. You would have to pay 100 or 10 percent of your initial deposit of 1,000 if you do a round trip (buy and sell) on those five shares. You have lost money just by entering and leaving positions if your investment does not generate enough to cover this.

Mutual fund loads

For a mutual fund, in addition to the trade charges, there are other charges as well. Mutual funds are professionally managed pools of investor funds that invest in a concentrated way.

When investing in mutual funds, an investor incurs several expenses. The management expense ratio (MER) that the management team charges each year on the basis of the number of assets in the fund is one of the most essential fees to consider.

The MER varies between 0.05% and 0.7% per year based on the fund type. However, the higher the MER, the lower the overall return of the fund.

When you buy mutual funds, you can discover a number of retail costs called loads. Some of them are front-end loads, but there are no loads or back-end loads. Make sure you understand if you plan to acquire a fund with a sales burden. See the list of no charge funds and no-fee funds for your broker if you would like to avoid these additional fees.

Diversify and reduce risks

Through diversification, you lower the danger that your investment will severely harm your whole investment's return by investing in a range of assets. As they rightly say, "You should not put all your eggs in one basket."

The most challenging task is to invest in inequities. As previously noted, the diversified portfolio could adversely affect the cost of investment. With a 1,000 investment, a well-diversified portfolio is practically impossible, so be mindful of the fact that you may have to invest in one or a maximum of two firms. That increases your risk.

This is why experts advise small investors to invest in mutual funds or ETFs. Both forms of securities have a wide range of shares and other investments, which make them more diverse than a single stock.

If you start with a tiny amount of money, it is possible to invest. You have to be aware of the limits you encounter as a novice investor and it's harder than simply choosing the appropriate investment (a feat that is challenging enough by itself).

You will be required to do your homework and evaluate the minimum deposit requirements with different brokers. You may not be able to acquire individual stocks in an economical way and yet have a small amount of money to diversify. You also have to select the broker you want to open an account with.


First Published: 30 Dec 2021, 09:26 AM IST