Prerequisite for Trading

Before we jump to the trading platform, again there are certain things that you need to know and ofcourse you also need a Dmat account. So, In this article we will see – Different types of brokers, The depository account or the Dmart account, How you can setup your own account and little about trading behavior.

In old times the shares were printed on papers and those papers were exchanged on the trading platform. (if you have seen the Hindi movie Guru) That is impractical now with current trading volume, and all of the exchanges and depository, and depository participants have turned electronic.

A depository is a company that holds shares in electronic or De-materialized form (Dmat). depository participant is an agent that communicates between depository and your trading account – its your broker. Basically when you open a trading account, the broker sets up a depository account for you. See how it works,

 As we have seen earlier, a stock gets listed on an Exchange, either BSE or NSE. From these listed stock we are going to buy or sell the stocks/shares. For this task there are three actors involved. First is the exchanges, The second actor is The depository companies. These depository companies actually holds your shares, not the broker. Brokers get signed  power of attorney from you to reflect your share holdings in your depository account. They work on your behalf to read and update your holdings in your depository account. So even if a broker shuts down its operations, your share holding stays secured at depository company.

 unnamed (1)CDSL and NSDL are the depository companies and your broker has registered with one of them, accordingly your broker opens a DP account for you.

The third and final actor is the broker who provides you with platform to buy/share the stocks. There are 2 types of brokers –
1. regular brokers/ full time brokers/ traditional brokers and,
2. discount brokers/ online brokers. The big difference is in terms of the brokerage charge you pay.

The discount brokers charge Rs. 0 on delivery and regular/ traditional brokers charge from 0.17 paisa to .30 paisa per Rs 100 transacted upto max Rs. 20 per order on delivery.  (this varies from broker to broker) The point being as your trading volume grows i.e. your investment amount goes on increasing you need to pay more brokerage if your account is with the traditional broker, but not so in case of discount brokers. (if you have seen the samco ads) Both of them charge for intra-day trade, (we will see what is that in a while.)

There are many discount brokerage companies but the leader is Zerodha. The other good brokers are 5 paisa, RKVS and  samco. (Good in the sense their visual platform). Zerodha offers kite as trading platform its a clear and easy to manage platform. While, 5 paisa is only discount breaker that gives stock recommendations.

Disclaimer : I have no affiliation with Zerodha, 0r 5paisa. Its a genuine opinion. I have trading account with all 4 brokers, but I prefer zerodha for its interface. (yes, you can create as many trading accounts as you want).

The only advantage of opening an account with traditional broker is – they provide stock recommendation and do the research stuff (the fundamental and technical analysis). They can also operate your account on your behalf like old times, you call them and tell them to buy or sell and they execute the order. But in age of internet that mode is quite irrelevant. The real use is of their reports and recommendations, because they works. So you can open one account with regular broker and one/ more account with discount broker. Good regular brokers are Motilal Oswal, Angel brokers, Edelwise, FundsIndia etc. Truth be told, all of this reports and information is also available on internet and from TV channels like CNBC T18.

If you want to know more here is an article by 5paisa on how the two brokers differ.

There is one more condition that the regular brokers put – initial capital i.e. you need to put some money (Rs. 10,000 or more) in your trading account to begin with. Discount brokers don’t ask any so you can start with as low as Rs. 1000.

Every day after your trading the broker sends you a SMS and an eMail enlisting your transactions, what you bought and sold. thanks to SEBI things are quite transparent in trading now.

To open a trading account all you need is,
1. Bank account with net-banking facility and some capital in account to invest,
2. Aadhar number (preferably mobile number linked with Aadhar for fast, online ekyc)
3. your PAN card number
4. A cancelled cheque with your name on it.
The cancelled cheque is required for bank mandate so that money can be debited/ credited from/to your account. You can visit the site of Zerodha or 5Paisa to create the account. The form filling is simple. once you fill the form, pay the initial account opening fees (Rs. 300)  take print out of the form, make few signs (most important the power of attorney document) and send it to their office. Within 3-4 days your account gets activated and you are ready to trade!

Now, regarding market itself.

The trading hours for Indian equity market are 9.00 am to 3.30 pm and it works for 5 days in a week, Monday to Friday. Although the market opens at 9.00 am, actual trading beings at 9.15 am the early 15 minutes duration is called as pre-opening and this slot is created to manage heavy volatility. Special events include merger and acquisition announcements, open offers, de-listings, debt-restructurings, credit-rating downgrades etc which may have a deep impact on investors wealth. In order to stabilize this, they conduct the pre-opening session.

Once the market opens at 9.15 am you can trade with 2 strategies – intraday or delivery. In intraday trading you basically buy and sell the shares on same day. But in case of delivery you buy the share and hold them at least for one day. intra-day is very volatile and you need technical analysis to make your decisions. The advantage of Intra-day trading is that you get margin i.e. if you have Rs 5000 in your account then the broker allows you to trade for 8 times* the amount (* this depends on broker) so even with Rs. 5000 you can buy shares worth Rs. 40,000. But then your position will be squared off by 3.20 pm automatically, that is, those shares will be sold irrespective of you making profit or loss. So you need to be careful. Also, for intraday trading brokerage is charged, even by the discount brokers.

In delivery you buy and hold the stock. This is the investors mode. You can be a short term investor (holding a stock for less than year) or you can be a long term investor with stock holding for more than a year. Its your choice and ofcourse market sentiment, you need to factor that as well. If you do delivery trading them the discount brokers don’t charge any brokerage. Intra day or delivery, if you trade you also pay the Government taxes STT and GST.

The CNBC TV 18 takes coverage of every day’s trade from 8.00 AM to 3.30 PM and it is highly recommended to watch that to know how market behaves and how we can interpret it. Atleast watch the channel from 8.30 AM to 9.30AM where they tell about which stock to buy on that day and then 2.30 PM to 3.30 PM where they answer queries of normal people like us.

finally the trading platform. here I am going to talk about kite from zerodha. and you get videos for this click this link. Dont start trading immediately after watching those videos, you still need to know a few things.

Once you open trading account and trade for the first time and buy few stock in your Dmat account, then you will see your holdings in your account. But on next day it may vanish. Don’t panic. There is a rule of T+2 settlement in share market. That is the shares you purchase are reflected in your account 2 days later you perform the trading. This +2 days is only about the working market days i.e. Monday to Friday.

Before we conclude this article, a little bit of technical analysis. Its bit of difficult to teach about it on a blog, it is better understood on live trading session with all the charts and patterns. Instead of that chart stuff, I am going to give some parameters that the technical analysts use. Rest charts and all, you will learn it once you start trading.

When i started trading I didn’t knew 1/2 of the information I have written about. (But don’t take my example, I entered into stocks when market was at lowest – 7900 now its pumped up at 10600+ and scope for silly mistakes is none.

Technical analysis: 

Technical analysis is like weather forecasting. In this, we look at the graphs of particular stocks and track their movement with respect to some parameters such as 50 days moving average and 200 days moving average. Which in essence means average of stock prices for past 50 or 200 days and their graph. These values will help you to understand up to what level a stock might correct or when to buy or sell.

Lets understand this with a practical example.
L and T housing finance is currently trading at Rs. 180. The stock saw high of Rs. 212 a month ago and then went into correction. This stock actually started its rally from Rs. 90 levels which means it gave more than 110% returns.

Its a good old stock, not a growth stock. The company is making profits yet it corrected to a level of 160, its 200 days moving average is 165. This is sort of base level and as expected after than the stock recovered to 180. considering the housing push by government, and bullish market on housing sector, This stock will again get to 212 and then upto 220-230. But as it is not a growth stock per say, it will not move faster, and it will take 3-6 months to reach that levels.

You can see this in this chart,

A candlestick chart of L & T housing finance on KITE, trading platform by Zerodha.

Pink line – 200 days moving average, Blue line is 50 days moving average at 177 and current price at 180 in red.

I know your question will be what are those weird red and green bars? They are called as candle sticks and they are most famous tool for technical analysis. But i am not yet expert on those. I can read them but then its just too technical So I am not going to explain it. Besides its really not required unless you are trading in lakhs.

Technical analysis is a kind of full time activity, if you want to learn more and be better at that there are books and resources on it, you can learn it. For our purpose as investor, the fundamental analysis and tips from experts is good enough to get going.

Get a glimps into Technical chart work here.

well, we have covered almost all of the essentials regarding market. This much information is good enough to get going, anything more – its up to your willingness. You are almost ready to trade but before jumping into the market, You need to be absolutely certain about few things, this is a market wisdom – you can learn it by self experience or you can learn from history and take wise decisions. So spend a little time to know some basic precautions you should take while trading.

That will be next and final article on this series on equity.

Next : Does-and-dont-of-trading

Here is a summary of your Journey to trading,

  1. Basics of Shares,
  2. Equity Related terminologies,
  3. Some technical stuff that you must know
  4. Some cautions and introduction to trading platform I.e. this article
  5. Some does and don’t of trading.