What is Trading in stock market?

If you want to participate in the stock market, you have two options. You can either become an investor or a trader. Both activities involve buying and selling securities but are different based on the risks associated and the duration of holding.

Investing refers to buying and selling shares of companies in the cash market with the intention to hold them for the long term. In this mode, you bet on the company’s business performance and growth over a period.

Trading refers to buying or selling either shares of companies or derivatives such as futures and options. The holding period in trading is much shorter, sometimes even seconds. As a trader, you bet on the movement of prices in the short term, not caring about how the business of the company is performing.

Types of trading

There are several types of trading:

Scalping: 

It is a type of extremely short-term trading. In this, you usually hold the position for mere seconds or minutes before squaring off the positions. This is to take advantage of small changes in stock price. To be effective, you must trade in large volume, several times a day. This kind of trading is extremely risky and requires you to be on their toes. Most scalping is done today via algorithms powered by computers.

Intraday trading: 

In this type of trading, you take a position for a single day. You will buy or sell a security but close the position by the end of the day. Intraday trading requires you to be aware of market volatility, any news about the stock you are trading and a good analytical mind.

Positional trading: 

This type of trading involves requires you to take a relatively longer-term position in a stock. You may hold the position for several weeks with a view that the market momentum will lift or push the stock price higher or lower over several weeks. Positional traders typically employ technical analysis before taking a trade.

Momentum trading: 

You can use momentum trading to take advantage of market momentum. The theory behind this type of trading is that movement in the stock price – whether downwards or upwards – works in several legs. For instance, if the stock price is moving higher, it will attract more buyers, which again, in turn, leads to a movement in prices.

Swing trading: 

This is another type of trading through which you can take advantage of market swings. Price of any stock moves in waves, rather than moving linearly. During such a movement, the price will make several crests and troughs. The idea is to buy when the price is making a trough and sell when it is making a crest. Swing trading requires sharp instincts and acumen to be successful.

How can you start trading?

You will require three basic accounts to trade – a bank account, a trading account with a broker and a demat account. These three need to be linked to each other for a convenient trading experience.

Most trading is now done online, though you can also trade in an offline mode if your broker provides such a service. Once you have opened all three accounts, you can log into the trading account that gives access to stock exchanges. There are basically four most popular exchanges – BSE and the National Stock Exchange (NSE) of India for stock traders, the Multi Commodity Exchange (MCX) for metals and energy commodity traders and the National Commodity and Derivatives Exchange (NCDEX) for agri trading. There are several other exchanges as well that facilitate trading but they are not that popular.

Once you are logged into the trading account, you can decide what stock or derivative to purchase or sell. You can now simply enter and fill out the order form and send the order to the desired exchange. If there is an equal and opposite order in the exchange, your order will be matched and executed successfully.

What are the advantages of trading?

Trading, if done successfully and with discipline, can be rewarding even in the short term. For several market participants, trading is a full-time job that generates regular income. Trading can also provide a side income if you are an investor.   

Traders provide liquidity in the market. Think for a second, if there were only investors in the market who held the stocks for a long term, where would new buyers get their stocks from? Thus, traders who buy and sell their holdings in quick succession provide liquidity in the market.

FAQs

Q. What do you need to start trading?

You need to open a bank account, a trading account and a demat account to start trading.

Q. What is Options trading?

Options are a type of derivative contract that gives buyers of the contracts the right but not the obligation to buy or sell a stock.

Q. What is futures trading?

Futures are a type of derivative that obligate buyers and sellers to buy or sell a stock at a predetermined future date and price.

Q. What time does stock trading start in India?

In India, the stock market opens for trading at 9.15 am. The market closes at 3.30 pm.