What is the stock market?

The stock market is a mechanism in which the shares of publicly traded companies are issued, bought
and sold. It is one of the most important parts of the free market economy. The stock market helps your
small money grow into big sum and become wealthy without involving the risk of starting a business.  To
many people, the stock market is nothing more than a gamble, but it isn’t actually a gamble.
Say you invested Rs 500 on one roll of a dice, where on your win you gain Rs x and in case of loss, you
lose the entire Rs 100. While if you invest in a stock market, it’s hard when you will lose all your money
unless there’s a serious problem with the company like in case of Kingfisher Airlines and there’s nothing
much to explain in this regard.

How does a stock market work?

The rise or fall in the stock prices is determined by a number of factors which includes demand and
supply, political or social unrest, media, availability of suitable alternatives, the opinion of renowned and
big investors like Rakesh Jhunjhunwala, natural disasters etc. These factors along with suitable
information help create a bullish or bearish sentiment in the economy.
Accordingly say if the number of buyers is more than sellers, stock prices will certainly go up. Similarly,
the stock price will tend to fall if numbers of sellers exceed the number of buyers.
What makes the stock market so unpredictable?
Let’s explain this discussion with an example. Say the stock prices have been rising for several years so
few investors will sit on the sidelines holding cash and waiting for the opportunities to go short. But the
point is that how to judge exactly when the selloff will take place. The important question here is that if
you are on the sidelines, how to understand that when to get inside the market? However, if you are
already in the market, how to judge when to exit the position. If making a prediction about the market
were so easy, then these questions would have been answered easily but actually, it’s not the case.
Now since we are done with the basics of the stock market, let’s understand how a novice can start with
the stock market-
When is the right time to invest in stock market?
Are you willing to learn or planning to build your career in the stock market?
So what are you waiting for?
If you are concerned about your age to learning in markets, let me tell you that there is actually no age to
learning or doing anything in life.
There’s a famous quote by Martin Luther King (Jr) which says-
The time is always right to do what is right.
Let me take two examples to show that there’s actually no age to do anything in life-
The first example is of Harland David Sanders (the man behind the KFC), who started his career in his
40’s and he franchised his secret recipe “Kentucky Fried Chicken” at the age of 62. Soon after that, he got
very successful.
The next example is of legendary investor, Warren Buffett who started his career at the age of 11. If you
are new in the field of the stock market, you must know or have heard about Warren Buffett. He is a
renowned investment guru and one of the most respected and richest businessmen in the world.
Warren Buffet said-
These two examples prove that there is actually no age to do anything in life.
How to start with the stock market for a novice?
1. Start with Warren Buffett’s letters to shareholders (which is like a bible to investors). It may so happen
that you face a problem with some aspects of the letters but these letters are supposed to be read and re-
read again and again to keep gaining the wisdom and knowledge from it.
Download the shareholder’s letter of Bershire Hathaway (Warren Buffet’s company).
You may read the following blogs to know more about the key lessons from Warren Buffet’s letters to
shareholders:

 Key lessons from letters of Warren Buffett- Part I

 Key lessons from letters of Warren Buffett- Part II

 Key lessons from letters of Warren Buffett-Part III

2. As a novice, you should read business newspapers like Economic Times, Business Standards, Mint etc
and watch business channels like CNBC, Zee Business etc to get a hang of the market.
To know what are the important things you should read or how to conduct business newspaper analysis,
watch the video below.
3. Start reading books like-
a. One up on Wall Street by Peter Lynch
b. The Intelligent Investor by Warren Buffett
c. Learn to Earn by Peter Lynch
Two important tips to keep in mind in the stock market are as follows-
i. Start early
ii. Money management techniques
Once you gain a basic understanding of the market, we’ll move on to the next level.
Beginner’s Checklist for Stock Market
Stock Market for trading minds
If Charts and Technical patterns interest you, it seems that you are drawn towards Technical Analysis. So
if you are new to this field, here are few guidelines you can follow to build your base in Technical analysis.
1. Read Good Books
Start with good books on Technical Analysis like-
a. Reminiscences of a Stock Operator (By Edwin Lefevre)
b. Trading for a living (By Alexander Elder)
c. Technical Analysis of the Financial Markets (By John J Murphy)
d. Japanese Candlestick Charting Techniques (By Steve Nison)
e. Encyclopedia of Chart Patterns (By Thomas Bulkowski)
2. Learn Technical Analysis
If you are willing to learn technical analysis from very basic, you can take up a course at
elearnmarkets.com. Click here to know more about the Technical Analysis Course certified by NSE
Academy.
Moreover, you can also go through the study material or videos in google to develop an understanding of
technical analysis.
3. Read articles and blogs
You can regularly go through good blogs or articles or videos like-
a. StockCharts
b. Tradeacademy
c. Elearnmarkets.com
d. Trading with Rayner
4. Virtual trading is important
Paper trading is a good way to track your performance and understanding on the subject. Moreover, you
can use NSE Paathshala for virtual trading. This process is very important before entering into the actual
trade in the market.
5. Market Psychology
Psychology plays a very important role in trading just like in a game of chess or in athletics. As a trader
progresses from novice to expert, the understanding of both individual and crowd psychology becomes
extremely relevant to become a successful trader apart from gaining the basic knowledge like chart
patterns, risk management, market structure etc. With the market becoming extremely competitive day by
day, traders are facing a lot of challenges which are sure to test their skills and limit of their psychologies.
Also Read: Mastering Trading Psychology and Money Management to Trade Effectively
6. Follow good traders
Start following good traders in the world. Read about them, their trading strategies, their books, etc and it
will surely benefit you in your trading career in the long run. Some of the well-known names in the industry
are as follow-
a. Paul Tudor Jones
b. Jack Swagger
c. Alexander Elder
d. Martin J Pring
e. John J Murphy
7. Opt for Professional degree
You can opt for CMT course, to gain specialization and detailed knowledge on technical analysis.
Stock Market for Investment minds
1. Books should always be the first step
Someone has rightly said-
“Books are one’s best friend”
Some of the good books on fundamental analysis are as follows-
1. The Intelligent Investor by Benjamin Graham
2. Competitive Strategy by Michael Porter
3. The Essays of Warren Buffett by Lawrence Cunninghan
4. Buffettology by Mary Buffett and David Clark
2. Education is important
Fundamental Analysis is a vast subject which starts right from reading Annual Reports and sector reports
to analyzing financial statement to the valuation of the company. It’s better to get proper education on
fundamental analysis, equity valuation, and financial planning.  You can opt for a Fundamental Analysis
course on Elearnmarkets.com
3. Read annual report of companies
There can be no better piece of information about a company than annual reports. It may look like a
collection of pages which companies send at the end of the year and reading it may seem to be a time
consuming and a boring job. However, it is a very valuable piece of information about a particular
company. In the annual report, the company’s management discusses the important aspects about the
company like industry performance, its vision for the long term, opportunities and threats faced by the
company, company’s historical performance etc.
Some of the important things which we need to focus while reading the annual report includes-
a. Chairman’s letter
b. Financial highlights- It gives a snapshot of the performance of the company.
c. Director’s report and MD&A section
d. Financial performance- It provides 10 years summarised track record
e. Financial statements
Few of the important areas where we should focus while reading annual and comparing the annual
reports:-
i. Debt scenario of the company
ii. Salaries drawn by the key personnel of the company
iii. Actions by the leading shareholders of the company
To know how to read annual reports, scroll the window below-
Also Read: Why We Should Read Annual Reports?
4. Read good blogs and magazines
Blogs are a good source of learning in today’s era where we are so busy with so many works. Reading
blogs or articles helps you gain a lot of understanding on the subject and building storehouse of
knowledge. Some of the blogs you can start with are given below-
a. Elearnmarkets.com
b.  FundooProfessor
c.  Farnam Street
d.  Safalniveshak.com
5. Make idol and follow
There are so many learned investors across the globe whom you can follow and learn from them. Read
their biographies or autobiographies, their lessons, and investment techniques. Some of the well-known
investors whom you can follow are as follows-
a. Warren Buffett
b. Charlie Munger
c. Jim Rogers
d. George Soros
e. Rakesh Jhunjhunwala
6. For specialization
You can opt for CFA course, to gain specialization and detailed knowledge on fundamental analysis.
How to generate Stock Investment ideas?
Once you start making investments in the stock market, the question arises as to how to maintain the flow
of investing ideas.
This is one of the important discussions in the investment world. Out of so many companies listed on the
exchange, it becomes really difficult to conduct research and decide in which companies to invest.
So if you think that it is very difficult to implement practically, here’s a list of ways to generate simple stock
investment ideas-
i. Stock Screeners- Use stock screener and feed your own list of criteria for screening.
ii. Disgraced Stocks- Never take cues from the stock price, rather look for strong businesses which have
corrected much from its highs.
iii. General observations- Seek ideas from things you use in daily life or see around yourself. Do
research on the companies whose product or services you like the most.
iv. Business media- Focus on the company specific news and avoid macroeconomic noise.
v. Blogs- Good articles and blogs can be used as a base to start your own research work.
vi. Read annual reports- After gathering information from the above ways, read the annual report of
companies in your circle of competence.

Also Read: 6 Simple Ways To Generate Stock Investment Ideas

To  know more about how to begin in the stock market you may watch the video below:
Power of Trading and Investment together:
It has been seen that they are able to generate better stock picks if you combine the expertise of both
trading and investment. Some of the well-known personalities who have done really well by combining the
expertise of both trading and investments are as follows-
a. Paul Tudor Jones
b. Mark Minervini
c. Rakesh Jhunjhunwala
Money Management techniques
Money management is a technique for managing money which encompasses investments, expense
control, and tracking, budgeting and taxes and it involves greater control of your incoming and outgoing.
In the field of investment, money management deals with the decision of how much risk an individual
should take in case of an uncertain situation. To be more specific, it highlights what percentage or amount
of the individual’s wealth should be risked so as to maximize the individual’s utility function.
In the stock market, it plays an important role in every success of a trading system. It has a close link with
trading expectancy, which can be defined as the average amount you can expect to win or lose with every
rupee at risk.
Let’s take an example that how money management plays a key role in your trading and investment life.
Say the probability of profit and loss of all trade stands at 60:40, so using money management a trader
can set his average win substantially higher compared to his average loss in order to produce a profitable
trading system. On an average basis, say if the win fetches him around Rs 1000 per trade while the
losses are limited to Rs 250 per trade, the expectancy stands at-
  Expectancy = (Trading system Winning probability * Average Win) – (Trading system Losing
probability * Average Loss)
= (0.6 x 1000) – (0.6 x 250)= Rs 250 i.e. the net average profit stands at Rs 500 per trade.
In simple words, the mantra of successful money management is to maximize every winning trade and
minimize all loss-making trades (regardless your %Loss probability > %Win probability).
Start investment with little money
It’s wise to see investment as something to be started small and then grown. It’s better to start where you
are if you have little money or very less capital. However, even if you have a good capital base, it’s better
to start small so that any big mistake doesn’t affect you much.
If you are a working professional with little extra money each month after paying off all your expenses, it’s
better to start with little money every month. It’s better to start with a SIP every month rather than direct
equity if you do not have much idea about markets and have no time to track the markets.
Also Read: Why should we invest in Systematic Investment Plans (SIP)?
Bottomline
We hope that this article helped and guided you in walking on the right track to further learning and
decision making in the stock market. A lot of time, dedication, patience and effort will be required to
become a successful trader and investor. To conclude, the stock market has so much to learn, so the
process of learning should never be stopped and rather it’s important to learn from your mistakes.
To know more about the basics of the stock market you may do: NSE Academy Certified Stock Market
for Beginners.
Do write us in the comment section if you face any query in any aspect of the financial market.
Stay happy and keep learning!