InvestorQ : I am new to the stock markets and am about to start trading. What are the key concepts that I need to be familiar with?
Khushi Patel made post

I am new to the stock markets and am about to start trading. What are the key concepts that I need to be familiar with?

Anjana Aiyar answered.
2 years ago

There are many unique concepts that investors and traders need to understand with respect to the stock market. Here is a rundown on some of the key concepts that you need to be familiar with...

Bulls and Bears: This is a common usage in stock markets. A bull is a person who is buying in the market expecting it to go up. On the other hand, a bear is a person who is selling in the market expecting the market to go down. Normally, these are not always distinct persons. A stock market trader can be a bull at lower levels and the same person can be a bear at higher levels.

Intraday Trading: Whey you buy shares, it results in delivery and the shares come into your Demat account. But there is something called intraday trading where you do not take delivery. For example if you buy 100 shares of Reliance Industries in the morning and sell it before trading closes at 3.30, then only the profit or loss gets adjusted to your trading account. Conversely, you can also sell a stock in the morning and buy it back before 3.30 pm. Remember you have to be careful in intraday trading. If you forget to close your buy position, you will have to pay the delivery amount. If you sell and forget to cover the same day and if you do not have the stock in your portfolio, then the stock will go into auction and you will have to bear a large loss.

Long and Short: When you are buying shares, you are on the long side and when you are selling shares you are on the short side.

Market Order and level order: There are two ways you can place a trading order in the market. You can define it as a market order, wherein the market will automatically execute the order at the best available price. Or you can set a level order that you only want to sell the stock if it crosses 85. The trading system will execute accordingly.

GTD and IOC order: A Good till Day (GTD) order is valid till the end of the trading session. An Immediate or Cancel (IOC) will be sent to the exchange for execution the moment it is placed and if it does not get executed then it is cancelled automatically.

Stop Loss and Hedge: These are risk reduction strategies. When you buy Tata Motors at Rs.415, you can set a stop loss at Rs.410. If the stock touches Rs.410, the trading system will automatically book the loss and exit. You will have to bear the loss of Rs.5, but it protects you from bigger loss. A hedge is the reduction of loss using futures and options.

Fundamental and Technical Calls: A fundamental call is given based on the inherent strengths of the company. A technical call is given based on market indicators like price, volumes, resistance, support etc.

Price Time Priority: This is a very important principle on which orders are executed on the exchange. If there are two orders to sell Reliance at Rs.980 and 985, then the 980 order will be executed first. If both sell orders are placed at the same price, then time priority comes into picture and the order that was placed first will be executed first.

Best price execution: This is another important principle on which trades are executed. This is done in such a way that both the buyer and the seller get the benefit. Here is how it works. If a trader places a buy order for Infosys at Rs.1900 and it is available at Rs.1885, then the order will be executed at 1885 and not at 1900. Similarly, if a seller places an order to sell Infosys at Rs.1900 but the current supply is available at Rs.1950, then the order will be excecuted at 1950 and not at 1900.

Internet Trading and Algorithmic Trading: Internet trading is available to all investors. Instead of calling up your broker or going to the broker office, you can execute your orders right from your computer or notepad. Algorithmic trading is used by large institutions and not by individuals. Instead of executing orders manually, these institutions trade using software programs which are much faster.