What is trading?

The term trading is simply referred to as buying and selling securities to make money on daily price changes.

If you want to trade in the share market, you should have a good grasp of the fundamentals of share trading. Investing is very much essential these days as savings alone is not adequate to beat inflation and fulfill all our financial goals. There are several investment opportunities available, and you can choose them as per your needs and convenience. It involves vigorous participation in the financial markets in comparison to investing, which primarily works on a buy-and-hold strategy.

This article allows us to study in-depth about trading, types of trading, and how it works.

Types of Trading

  • Scalping : Scalping is also known as micro-trading. Basically, it is a subset of intraday trading. It is a trading style that specializes in profiting even with small price changes. It can be done several times in a day. Even though all transactions don’t yield profits and in some, a trader’s gross losses might exceed the gains. Thus, it requires a strong exit strategy for the trader to ensure that he does not incur large losses which can nullify his previous gains. In this case, the holding period of the securities is shorter compared to day trading. This requires market experience, proficiency, awareness of market fluctuations, prompt transactions, and strong mental resolve.
  • Day Trading : This form of trade involves buying and selling stocks in a single day. A trader involved in such trades needs to close the position before the day’s market closure. Day trading requires proficiency in market matters and a good understanding of market volatility. Therefore, day trading is mostly practiced by experienced investors.
  • Swing Trading : This form of trade is used to capitalize on short-term stock patterns. This style is used to earn gains from stock within a few days of purchasing it. In swing trading , investors primarily stick to technical analysis (looking at the charts, patterns etc.) to anticipate the direction of the market.
  • Momentum Trading : When stock price moves upward for a certain duration of time, they are said to have gained momentum. In momentum trading, the traders attempt to profit from this price move. They take position with the aim to sell when the peak is reached. Here, you might have to wait for a few hours or days to earn the desired profit. Moreover, the idea is to purchase stock in large quantities to earn substantial gains.

How Trade Works?

Share trading is buying and selling of companies listed on the 2 leading stock Exchanges:

  • Bombay Stock Exchange (BSE)
  • National Stock Exchange (NSE)

  • The one who buys the shares gets certain ownership in the company and he is entitled to a certain percentage of stake.

    Share market works in the following manner:

  • Through an Initial Public Offering (IPO) a company gets listed in the primary market
  • In the secondary market, the shares get distributed
  • Here, in the secondary market the stocks issued are traded by the investors
  • The registered entities with the stock exchanges i.e., stockbrokers and brokerage firms, offer investors and traders to buy the share at a said price
  • Then, your registered broker passes on your buy order to the exchange, which searches for a sell order for the same.
  • Once both buy and sell orders are matched, then the order is set to be executed.
  • This whole process takes T+2 days meaning your bought shares will get deposited in your Demat account in 2 working days from the day you placed the order.
Example

An investor holds 5000 shares of ABC Limited at Rs. 10 per share. Later he sees the share prices showing an upward momentum, so he decides to sell 2000 shares at Rs. 20 per share on the first day and then sell the remaining 3000on the next day as price rises to Rs. 25 per share.

Profit/ Loss Calculation:

={[2000*20]+[3000*25]-[5000*10]

=[40000+75000]-50000

=115000-50000

=65000 (Profit)

What is online trading?

Online trading can be easily done just by opening a Demat and Trading Account with any SEBI registered broker, which offers online services

Opening an account can be done in a matter of just 10 minutes, all you need are the following documents- PAN card, address proof, AADHAAR card, a mobile number linked to AADHAAR, bank statement, canceled cheque leaf, and photograph.

In online trading , you can place your trade orders or cancel orders at your will and from the comforts of your home. You can also buy shares or invest in IPO or buy Mutual Funds.

What are the advantages of Trading?

Below are some advantages of trading in the share market-

  • Take advantage of the growing economy : When an economy grows, it also facilitates the growth of corporate earnings, this is because the economic growth creates more job opportunities, resulting in more income and more sales. Thus, an investor investing his/her money in the stock of the business, influenced by economic growth helps it to grow better.
  • Easy process of buying and selling : Buying and selling of shares in the stock market is simple and easy for all investors, all you need is a Demat account which can be opened through a broker, financial planner, or online mode. Opening an account hardly takes 15 minutes to set up and start your investment journey. Once this is done, you can place your buy/sell orders.
  • Flexibility to invest in a smaller amount : A new investor can even start with a small amount by purchasing stocks of small-cap or mid-cap companies but in smaller units.
  • Liquidity : Stocks are known as liquid assets as they can easily be converted into cash at any point in time. When compared to other financial assets.

Trading vs Investing

When it comes to wealth creation, both trading and investing are two important attributes of it. For instance, you and your brother bought an equal amount of seeds and you sold them to someone on the same day because you could earn a profit. On the other hand, your brother sowed the seeds and let them grow for a year till they have new seeds. He sold the lot and continued to sow the new seeds and grow crops. By investing in his seeds, he too made profit however, took a different approach than you did.

  • Identity Proof: PAN Card
  • Address Proof: Either Aadhaar Card, Passport, Driving License, Voter id or last 3 months bank statement
  • Photograph
  • Signature on white paper
  • Bank Details: Any Bank proof (cheque or Passbook) bearing client name, account number & IFSC code
  • Income Proof: Either 6 months bank statement, 3 months’ salary slip, net-worth certificate, Holding Report, ITR Statement or Demat Holding Statement.

Advantages of Opening a Trading Account

Trading Accounts offer manifold benefits to the investors, making the share trading ecosystem more robust and efficient. A few of such advantages are detailed below:

This is the difference between both trading and investing in simple terms.

Let’s study below trading vs investing:

  • Period : In trading, stocks are usually held by the investor for a short period (for a week or a day), whereas investing is an approach that works on the buy and hold principle, and the investor may invest for several years as well.
  • Capital growth : In trading, traders look at the price movements of stocks, and if they notice an increase in price, they sell the stock to book profits. Whereas in investing, it requires a patient approach. Wealth is created by compounding interest over the years.
  • Risk : Both trading and investing imply risks. Trading comparatively involves higher risks as the price might go high or low in a short interval. On the other hand, investing is an art, it takes a while to develop. Therefore, it involves lower risk.

Final Thoughts

Investors need to be cautious while making investment decisions. A basic understanding of the concepts involved with trading and investing will help them lessen their risk and improve gains.

Frequently Asked Questions - Trading

All you need is to first open your Demat and Trading account and understand few basic terminologies like – Delivery, Intraday, Stop Loss, etc.

Intraday traders take position in shares whose price is expected to rise during the day. They square-off the position before the market closes on the same day when a desired price is reached. Day trading does not help one get rich in a day. Many traders start intraday trading with the assumption that they can earn enough money by making profits with just a single trade. But practically, this is not possible.

- There are multiple parties involved in the share market. When you place a buy order, a particular share at the said price, is forwarded to the Exchange.

- Once an opposite order at a similar price is placed by another investor, the order is matched & settled by the Clearing Corporation.

- Buyer receives the credit of share in Demat account after T+2 days, where T is the day of the transaction

Options trading gives traders the choice to buy a Call or a Put option. When one expects the market to go up, they buy a call option. If the price of the share/index is above the strike price of the chosen call option, the call buyer makes a profit. When one expects the market to fall, they buy a put option. If the price of the share/index is below the strike price of the chosen put option, the put buyer makes a profit.

The difference between stock trading and investing is that stock trading is about buying and selling for short-term profit (such as, within a day), whereas investing is about buying shares for long-term gains (such as, within months or years).

Share market opens from 9:30 AM. You can keep a watch on the news & take positions post-market opening.

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