INTRODUCTION TO STOCK MARKET TRADING

Stock market trading is the process of buying and selling shares of publicly listed companies through authorised stock exchanges. These shares are commonly known as stocks or equities in stock trading terminologies. The stocks held by an investor fundamentally imply that the individual has purchased a small portion of the company’s equity ownership. The primary purpose of stock market trading is to earn profits by directly participating in the financial growth prospects of the company. This is usually executed by leveraging the stock appreciation by selling the shares at a price higher than the original purchase price of the stocks. 

TYPES OF STOCK MARKET TRADING

Some of the common types of stock market trading strategies are:

• Intraday trading:

Intraday trading refers to a common type of stock market trading that involves the buying and selling of stocks within the same trading day. Traders participating in intraday trading hold the stocks for a very short duration, which is usually in minutes or a few hours. The trading hours are usually 9:00 AM to 3:30 PM every day, except weekends and stock trading holidays. So, intraday traders need to close their positions within this time frame before the market closes. The main objective is to benefit from short-term price fluctuations instead of holding the stocks for a longer duration. Despite it being immensely rewarding, intraday stock trading involves a high level of risk due to market volatility. So, traders must have a thorough knowledge of the stock market paired with technical analysis to make well-informed decisions. 

• Swing trading:

Swing trading is considered a short-to-medium term online share trading strategy. Traders hold the stocks more than a single trading day, usually from several days to a few weeks. The key objective of swing trading is to capitalise on short-term patterns of price movements. This strategy often requires traders to use technical as well as fundamental analysis to predict upcoming price fluctuations and trends. Additionally, it is preferred by traders who can’t monitor the stock market full-time but still have a risk-taking capacity.

• Position trading:

Position trading is a long-term stock trading strategy, where the traders hold a stock for elongated periods, which may go over a few months to a few years. They do not base their decisions on short-term price fluctuations or temporary market conditions. Rather, they look for the bigger picture by focusing on the underlying growth potential of the company’s stock in the long run. To support their decision making, position trading investors rely heavily on fundamental analysis of the company. This type of stock trading requires patience and rational predictions for the future in order to ensure calculated decisions in online share trading. 

• Micro trading:

Micro trading is also commonly referred to as scalping trading strategy, which involves making extremely small yet high-frequency trades within the same trading day. The holding period for stocks is very short, sometimes even within a few seconds or minutes. Even though the profit earned with a single such trade might not be very significant, traders complete several such micro trades which collectively result in huge gains. The motive of micro-stock trading is to capitalise on quick price movements, sometimes coupled with the use of technology and automation to execute the process instantaneously.

• Momentum trading:

Momentum stock trading is a strategy where the traders focus on significant price movements, both upward and downward. The aim of this technique is to sell the stock at a price higher than the original purchase price or to buy a stock at a lower price than previously sold. This is because momentum traders believe a particular trend of price fluctuation is likely to continue for a certain period to market sentiments. However, the risk involved is high as trends might reverse quickly. Thus, it is vital to make quick decisions with effective risk management. 

HOW STOCK MARKET TRADING WORKS

Stock market trading involves trading shares of publicly listed companies through registered stock exchanges like NSE and BSE in India. To participate in the trade, the following steps must be followed:

• The foremost step to begin online share trading is to open a trading and demat account. 
• Once the trader’s account has been opened, stock trading can be done in accordance with the prices listed on the regulated stock exchange. 
• After the trade order has been executed, the trader will receive a confirmation including all the relevant information, such as the quantity of shares traded, price details, date and time of the trade, etc.
• The trade order will be settled following the T+1 settlement cycle. After the settlement is done, traders must monitor the performance of their holdings and manage their portfolios accordingly.

ADVANTAGES OF STOCK MARKET TRADING

There are multiple advantages of participating in stock market trading. Some of them are:

• Financial growth prospects: 

Stock market trading provides the opportunity to earn substantial returns within a short period of time. Traders can capitalise on price movements by monitoring market trends while online share trading, combined with strategic trading techniques for rational trading decisions. 

• Liquidity:

Stock trading allows traders to derive profits while maintaining the liquidity of their funds. This is because stocks can be bought and sold at any time as per the trader’s convenience, thus proving to be highly liquid assets. Additionally, it allows traders to make quick decisions in case of dynamic market conditions.

• Flexibility: 

Novice traders who lack in-depth knowledge of financial markets can also participate in stock market trading by starting with relatively smaller amounts in comparison to experienced traders. This allows them to ensure phased implementation of their acquired stock trading knowledge while maintaining a step-by-step approach. 

• Accessibility:

Online share trading facilitates traders’ access to participate in the financial growth of the country’s economy. As the companies continue to improve their financial position, the price of their shares also increases, leading to significant gains for traders. 

• Transparency:

Since the stock market trading is regulated by the Securities and Exchange Board of India (SEBI), traders are confident about the safety of their funds owing to the strict regulations made to ensure investor protection and market integrity on online share trading platforms.

COMMON MISTAKES WHILE STOCK MARKET TRADING

To ensure rational decisions, it is fundamental to avoid common stock trading mistakes. Some of them are:

• Lack of financial knowledge: 

Stock trading should be done only after gaining in-depth knowledge of the stock market, including the company’s financials, market situation, and industry trends. It is advisable to avoid making decisions by solely relying on public rumors or tips from unverified sources. 

• Not prioritising stop loss limit:

A stop loss refers to a predetermined limit that is set by the traders to exit their position in case the stock is incurring losses. Even though this is subject to a trader’s risk-taking capacity, it is imperative to prioritise a stop-loss limit to prevent further losses.

• Making emotion-driven decisions: 

Stock market trading involves rational decisions made after thorough research and analysis. So, it is important to avoid making emotion-driven decisions due to fear, impatience, or greed. This is because extreme optimism might convince a trader to hold a stock longer than he is supposed to, while pessimism might force him to close his positions too early.

• Avoiding portfolio diversification: 

Stock trading should be done with a well-diversified portfolio including various companies and industries. This is done in order to avoid the risk caused by any specific company or sector underperforming. A balanced portfolio is crucial to overcome such potential losses in online share trading. 

• Lack of risk management strategies:

Stock market trading without implementing strategic risk management measures can prove to be a capital-destructive decision. So, it is extremely important to have well-defined strategies to mitigate the risks associated with financial markets.

IMPACT OF ONLINE SHARE TRADING 

Online share trading has significantly improved the financial soundness of the country by facilitating convenient access to the stock market. Earlier, participation in stock markets used to be restricted to financial institutions and few individuals who had access to financial brokers. However, with the advent of online share trading, all individuals can open their demat accounts and participate in the stock market, resulting in higher daily trade volumes. Additionally, trading has become more strategic as it enables transparency in all aspects of investing, thus supporting rational decision-making. However, it has also led to an increase in the number of financial frauds taking place due to misinformation and scams. Therefore, stock trading must be done only after gaining thorough knowledge about financial markets and verified stock market trading platforms.

CONCLUSION

Stock market trading has evolved the financial landscape of the country while simultaneously providing traders with opportunities to grow their wealth. With the advent of online share trading platforms, the trading process has become significantly convenient and efficient. Traders must keep themselves updated with the market dynamics coupled with strategic risk management techniques to ensure rational stock market trading decisions. 

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FAQs On Stock Market Trading

1. What is stock market trading?

Stock market trading involves trading shares of publicly listed companies through registered stock exchanges like NSE and BSE in India.

2. Is online share trading only for experienced traders?

No, online share trading can be done by beginners too. However, it is important to conduct proper research before starting trading. 

3. Is trading and investing the same?

No, trading is the buying and selling of shares with an aim to benefit from the short term price fluctuations. On the contrary, investing involves holding a stock for a longer duration.

4. What are the types of stock market trading?

Some common types of stock trading are intraday trading, micro trading, position trading, momentum trading, and swing trading.

5. What are the benefits of online share trading?

Online share trading is beneficial as it allows accessibility to live market updates and many technological advancements to support rational decision making. 

Disclaimer: This is for general information and education purposes only. The Securities quoted (if any) are for illustration only and are not recommendatory. Past performance does not guarantee any future returns. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.

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