Stock trading or equity trading refers to buying and selling shares in different companies to have profits from short-term price fluctuations. It is important to note that stock trading is different from stock investing. In stock investment, investors buy stocks and hold onto them to earn capital gains or dividend income.
Stock trading requires much more than investment in capital and money. To make money off short-term price fluctuations in a highly volatile stock market, timing the market is significant.
How Does Stock Trading Work?
Let us look into some of the vital aspects of stock trading for beginners.
- Trading in stocks necessitates the opening of a Demat account. When one buys stocks, the Demat account is credited, and when one sells stocks, the Demat account is debited.
- Stock prices are subject to constant fluctuation and are affected by several factors: political upheaval, economic policies, and company mergers and acquisitions, among many others, play a significant role in the movement of stock prices. You require a basic understanding of the stock market to know when to enter or exit a trade.
- Ensure that the bid price and ask price facilitate a profitable trade.
- Fundamental and technical analysis of stocks is essential to predict the movement of stock prices in the future.
- Utilize the stop loss feature to maximize returns and minimize losses.
- Seeking expert advice will help you make correct estimations and guide you in the right direction. However, this might not guarantee a successful trade.
Types of Trading
Depending upon the risk appetite, financial goals, and the period for which one wants to remain invested, there are many types of stock market trading and subsequent strategies. These can be grouped into two types based on investment strategies and period.
Based on Investment Strategies
Technical Trading
As the name suggests, technical trading is based on a detailed market analysis through index graphs and charts. Technical trading gives a thorough understanding of stocks and market dynamics to traders.
For successful technical trading, they need a sound knowledge of share markets, the economy, and the technical functioning of stock trading in India. It would be ideal for traders with a high-risk appetite since this trading pivots on an accurate understanding of market trends, as a miscalculation could lead to potential loss.
Fundamental Analysis
Fundamental analysts predict and study the market based on events and information related to the company, like its management, share splits, mergers and acquisitions, financial statements, estimated growth analysis, etc.
These traders believe in long-term investment, or buying and holding on to the shares until the tide changes and they can enjoy high returns on their investments.
Based on the Period
Intraday Trading
Intraday or day trading is a short-term investment where traders buy stocks and sell them on the same day before the stock market closes for the day. Traders who want quick profits without any involvement deal in day trading.
Although this is a profitable venture, it could also result in losses if the traders are not careful with the margin. Intraday trading requires extensive stock trading knowledge, a wise selection of stocks, and undivided attention while the market is live.
To invest in the best stocks for intraday trading, consider these tips:
- Only invest in liquid stocks.
- Avoid volatile stocks. Since the time frame is of a day, volatile stocks can force investors to exit the trade at a loss.
- Trade in companies with ample information to make a thoroughly researched and informed decision.
Scalping
In scalping, a trader does not make high returns from the trades. Instead, they conduct up to hundreds of trades in a day and design the buying and selling of stocks to scalp small profits in each trade that would result in substantial gains in a cumulative effect.
Momentum Trading
In momentum trading, traders keenly follow the movement of particular shares; in case of an upward trend, they trade expecting to reap benefits from the forward momentum of the stocks.
Swing Trading
Swing trading hinges on holding on to stocks for more than a day. It takes a few days to several weeks for some event to produce some significant price change in the shares, resulting in sizable profits for the traders.
Again, the traders must be able to study the undercurrents of the share market to obtain a positive reading of the market trend leading up to the momentum.
Position Trading
Positional trading is a long-term strategy. Here, the traders move intending to buy and hold the stocks for a long period. It is a more low-maintenance form of trading, as traders do not have to monitor the market trends every day since this is not susceptible to the slightest movements in stock trading.
Of course, the traders must patiently wait for the returns to increase significantly to make the trade successful. Like technical trading, positional trading requires an in-depth knowledge of the stock market and the company before buying any shares.
Conclusion
As discussed, there can be several types of trading in the stock market. Trade in the ones that suit your goals and risk appetite. Stock trading can be profitable, but it is a risky endeavor. Hence, it is best to start trading under the guidance of stock brokers who have years of experience and technical knowledge.
Beginners can avail the plethora of information available on stock markets, like YouTube videos, articles, and blogs, to learn more about the tools and techniques of stock trading. Nowadays, many apps are available with AI-supported market analysis tools to guide traders navigate this complex business.
Still, learning the fundamentals of stock trading is essential to trading since nothing can replace a rational and human understanding of concepts and strategies.