TOOLS FOR TRADING
In this lesson, we will equip you with everything you need to start trading, right from websites you should visit, to setting up your computer and opening a brokerage account. Choosing a broker is probably one of the first decisions you make bef...
TOOLS FOR TRADING
In this lesson, we will equip you with everything you need to start trading, right from websites you should visit, to setting up your computer and opening a brokerage account. Choosing a broker is probably one of the first decisions you make before you start investing or trading in stocks.
1-Choosing a Broker: Discount vs Offline brokers
I’m sure you’ve noticed that more and more consumers are buying their day to day things online. Imagine if 10 years ago you had told your parents that today, you’d be buying a watch for your best friend online and would have it couriered to his house right on time so that it arrives on the day of his birthday. Your parents would have likely reacted by thinking you’re insane.
But here we are, in 2015, and that’s the world we live in. We buy our watches online on e-commerce websites. We can go to local stores/showrooms down the street but we just love buying stuff online.
Why is that? The watch you purchased online could have been purchased at a shopping mall near your house. We can’t really see the watch we’re buying online. We can’t touch it, feel it. And yet we buy it anyways.
The obvious reason is price; the watch could have just been cheaper online. Another, equally compelling reason is convenience; who wants to wake up on a Saturday morning and drive to a store, find a watch they like, stand in line to pay, and come back home- when you can do the same exact thing, for cheaper and from the comfort of your home! And finally, the customer service provided by the website might be, as odd as it might sound- amazing. Even if it’s through email and phone support- the customer service experience might win us over.
So, how does that relate to the brokerage industry? Well, the analogy is this:
Online shopping V/s shopping mall is akin to Low cost brokers v/s ‘offline’ brokers.
Offline brokers sometimes have hundreds, even thousands of branches and stores across the country. And while 10 years ago, when the internet was not widely accessible, it made sense to go visit an offline branch and open an account, learn how to trade. But not anymore, discount brokers are completely online and pass on all those savings to you, the customer and focus only on two things, good customer service and great software.
At this point you might be wondering what exactly the benefits of discount brokers are.
Well, as the name suggests, discount brokers are significantly cheaper to trade through. Let’s take an example.
Let’s say you buy 2000 shares of Reliance, the turnover on this trade is almost 40 lakhs.
You will notice that brokerage charged is Rs 40. So if your turnover is 1 lakh, 10lakhs or even 1 crore, you are still charged Rs 20 flat fee.
But look at this; you have other charges, STT, stamp duty which traders like us pay.
When we are trading this is an essential part of money management, managing risk is a huge part of your methodology, we need to know what our costs are and we should treat our trading like any other business.
Traditional offline brokers on the other hand, instead of charging you Rs 20 per trade, a flat fee per trade they would charge a percentage, so if your trading business grew, their brokerage will increase. Say that percentage charge is 0.02% and that means this will be about Rs 720.
Their take would be Rs 720 on this trade, if your turnover increased so did their take.
Just choosing a discount broker has got a 95% savings for traders.
But don’t take my word for it, go online and use the brokerage calculator, do your research and pick a good broker.
Often times, offline brokers will have “tips” and advisory services to inform investors what stocks to buy or sell.
Suppose you are looking to buy air tickets. You can deal directly with an airline, but the airline also offers, amazingly, advisory agents who get paid a salary by the airline and also get a commission for each ticket you purchase through the airline. The agents, employed by the airline, claim to offer you the best deal possible.
This sounds great! But on the other hand you have an independent agent who is not employed by an airline.
Who would you rather trust? The employee at the airline who gets paid a commission for selling you a ticket through his particular airline, or the independent agent who seeks to find you the best deal possible through whichever airline provides the best offer.
The answer is obvious, right? You’re going to go with the independent agent.
Similarly, offline brokers offer an advisory service to their clients. Each day, a relationship manager from the broker will give “tips” on which stocks to buy or sell to their clients. We would advise you not to follow these “tips”. We at Trade Academy, aim to equip you to make your own smart and informed decisions based on your own research.
Here’s a quick checklist you can follow when it comes to selecting which broker to trade through.
Stay away from brokers claiming to provide exceptional returns, it’s not a broker’s responsibility to advise its clients on what stocks to buy and sell! A broker’s responsibility is to be a transparent middleman between you and the stock exchange.
Stay away from brokers that do not clearly state how much they charge on their trades; many brokers in India, unfortunately, get away by charging “hidden” fees.
Look at how many complaints have been registered against the broker. The NSE’s website does a great job in showing how many complaints have been registered against. Your money will be sitting with the broker- make sure it’s got a clean track record with minimal complaints.
Do not underestimate things like customer service, being able to trade online, and being able to place trades through your phone.
2-Opening Your Account
Alright, you’ve made the most important decision, which was to choose your broker! Let’s quickly run through the basics of what you need to know to finally get your feet wet!
The first thing you’re going to have to do is go through basic account opening formalities. In a nutshell, you will need to sign some documents, prove that it’s actually you that will be trading on the account by going through a process called In Person Verification.
Next, you install the trading software. Most likely, you will be doing your trades on your Desktop, but some brokers also offer mobile versions. Your broker should assist you with getting the software installed, and ideally, should give you a demo on how to login, place trades, and just get comfortable using the software. (and if your broker doesn’t do that- it might be a good indication that you’re with the wrong broker!)
3- What is Margin Money?
We’re going to quickly go over the concept of margin. Brokers often try to “outdo” each other by offering more margins to their clients. On paper, margin sounds almost magical. In essence, what the broker does is “lend” you money at 0% interest. For example, let’s say you’re looking to buy 10 lakhs worth of shares in the morning and sell it in the evening. The broker might offer 10:1 margin, meaning only 1 lakh will be used up from your account to purchase the 10 lakhs worth of shares. The broker will pay up the remaining 9 lakhs. Sounds magical, right?
Margin can be wonderful; but it can also be disastrous. If the stock starts to move against you, your broker will call you mid-day- asking you to replenish your funds to cover up the shortfall. In essence, here is what it comes down to: avoid using margin when you are starting out with stocks. Many investors and traders get wiped out because they overextend themselves.
Our philosophy at Trade Academy is simple: until you’ve mastered your methodology, stay conservative and say no to margin.
Welcome to the world of trading, fueled by testosterone and endless amount of caffeine. But if you study the best investors and traders…there’s one word that comes to mind.
The KISS principle is one that works wonders with investing and traders: Keep it simple stupid! In reality, an average laptop or computer is all you need to not just do well, but to beat those crazy delusional traders. Remember how we used the words “irrational exuberance” and “mania” in earlier lessons? The crazy traders with 20 monitors and pounding cup and after cup of coffee are the ones that cause those terms to get invented in the first place.
Don’t become one of those guys. Keep it simple
Keep in mind, you can always use your mobile phone and tablet to place your orders! We live in a digital world. All you need is a reliable internet connection and reliable trading software to trade on.
5-Sources of News
When it comes to the stock markets, news is what moves the markets. But you need to get the news in a timely manner. Not only that, but you also need to ensure that the news source is credible. Here are some great websites and news sources to get you started. Keep the websites open all the time! If your mobile allows for flash alerts through mobile apps, enable them! And if it falls within your budget, subscribe to newspapers like the Wall Street Journal and the Economic Times. As you begin your journey into the world of investing, being informed is going to be the most important task on your hand. And what about company financials like balance sheets and income statements? These websites can provide you with really resourceful data.
6-List of recommended reading
Here is my favourite part, trading and investing is a never ending process of learning. As the world we live in changes, old ways are replaced by new tweaks; keep yourself open to new ideas. These are some of the timeless books most people recommend.
7 – Charting
Then we have technical price charts, there are a lot of options, free and paid – check them all out to make a decision. Remember if you are trading on the daily timeframe then it is always free of cost but the real time data will always cost you. Here are some places where you can get charting at.
8 – Trading Methodologies
So now that you’re equipped with the basics to get started- technical trading which uses price charts or fundamental analysis which uses company financials. And as cliché as this might sound, since we have all read or watched Harry Potter…think of your trading methodology like a wand. As the famous quote goes, “The Wand chooses the Wizard”. And once you have found the trading methodology that you feel is right for you, you are ready for the next course in the series. Until then, keep experimenting. We’re going to leave you with a handful of the most commonly used trading methodologies legendary investors and traders have used, and continue to use.
“The Father of Value Investing, Graham is famously known for being Warren Buffet’s inspiration. His classic book and widely considered as the “bible” on the basics of investing can be found in the 1934 classic ‘Security Analysis’. His most popular book, and still widely used to this day is ‘The intelligent investor’ published in 1949. Regardless of what methodology you pursue, this is a must read book for all investors and traders.
“The Warren Buffett of India”, Jhunjhunwala is a living legend. Widely regarded as the most prominent and well known investor in India. Jhunjhunwala followed and continues to follow many basic value investing principles. His investment philosophies are more aligned to trend followers such as George Soros than a long time value investor as Buffett. Jhunwala is a big believer in investing in companies with a solid backbone of entrepreneurs with a clear vision in mind.
The Oracle Of Omaha, Buffett is widely regarded as the greatest investor of all time. With a staggering net worth of 50+ billion USD, the simplicity of his decision making is what makes him so endearing to his followers. He does not simply buy shares of a company: his decisions are based off the premise that he will forever own the company, thereby breaking any thoughts of short term gains that could compromise the long term growth of the company. Buffett has influenced millions of value investors around the world.
Swing Trader Legend: Paul Tudor Jones
Shorted black Monday crash, Trading since 1976 Paul Tudor Jones was seen in the famous movie ‘trader’ where he candidly talks about an impending crash based on stock charts. He used data to statistically analyse the probability of a crash, and (pause) he was right! Today he manages a hedge fund using a mix of top down macro economics and price charts. He was one of the highest earning managers in 2013, with a networth of over 4 billion dollars.
This is the last video in this series and we have shown you that investing in the stock markets is probably the wisest investment decision you can make. We have shown you what stocks are, how they get formed, and how they get listed on stock exchanges. We have explained the roles of all the different players involved: the stock exchanges, SEBI, how to choose a broker, and how to get started! We have shown you how prices can rise and fall, giving you opportunities to buy and sell at the most opportune times.
In the next few courses will take you through technical analysis methodologies and fundamental analysis techniques. Join us again to know more.