A Comprehensive Guide to Trading in the Share Market

Trading is the process of buying and selling securities to capitalize on daily price changes. It is an essential aspect of the share market, requiring a solid understanding of its fundamentals. In today's financial landscape, investing alone is not sufficient to beat inflation and achieve financial goals. This article aims to provide a comprehensive overview of trading, its various types, and how it operates.

1. Types of Trading

Scalping

Scalping, also known as micro-trading, is a subset of intraday trading. It focuses on profiting from small price changes and can be executed multiple times within a day. While not all transactions yield profits, a trader must have a robust exit strategy to prevent substantial losses that could nullify previous gains. Scalping requires market experience, proficiency, awareness of market fluctuations, prompt transactions, and strong mental resolve.

Day Trading

Day trading involves buying and selling stocks within a single day. Traders practicing day trading aim to close their positions before the market closes for the day. Proficiency in market matters and a good understanding of market volatility are crucial for success in day trading. As a result, this trading style is predominantly pursued by experienced investors.

Swing Trading

Swing trading focuses on capitalizing on short-term stock patterns. Investors who practice swing trading primarily rely on technical analysis, such as studying charts and patterns, to anticipate market directions. By carefully analyzing these indicators, traders aim to earn gains from stocks within a few days of purchasing them.

Momentum Trading

Momentum trading involves taking advantage of stocks that have gained upward momentum over a certain period. Traders in momentum trading aim to profit from this price increase by buying stocks with the intention to sell them when they reach their peak. This strategy may require waiting for a few hours or days to achieve the desired profit. Furthermore, the idea behind momentum trading is to purchase stocks in significant quantities to maximize potential gains.

2. How Trading Works

Trading in the share market involves buying and selling securities listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). When you buy shares, you acquire ownership in the company and become entitled to a certain percentage of stake.

The share market operates in the following manner:

1.  A company gets listed in the primary market through an Initial Public Offering (IPO).
2. In the secondary market, the shares are distributed to investors.
3. Stockbrokers and brokerage firms registered with the stock exchanges offer investors and traders the opportunity to buy shares at a specified price.
4. When you place a buy order, your registered broker forwards it to the exchange, which then searches for a corresponding sell order.
5. Once both buy and sell orders match, the transaction is executed.
6. It takes T+2 days for the shares you purchased to get deposited into your Demat account.

Example

Let's consider an example to better understand trading:

Suppose an investor holds 5000 shares of ABC Limited at Rs. 10 per share. The investor notices an upward momentum in the share prices and decides to sell 2000 shares at Rs. 20 per share on the first day. The investor then sells the remaining 3000 shares on the next day as the price rises to Rs. 25 per share.

Profit/Loss Calculation:

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

= [40000 + 75000] - 50000

= 115000 - 50000

= Rs. 65000 (Profit)

3. Understanding Online Trading

Online trading offers a convenient way to trade securities by opening a Demat and Trading Account with a SEBI registered broker that provides online services. The account opening process can be completed within 10 minutes, requiring documents such as PAN card, address proof, AADHAAR card, mobile number linked to AADHAAR, bank statement, canceled cheque leaf, and photograph.

With online trading, you can place trade orders, cancel orders, buy shares, invest in IPOs, or purchase Mutual Funds from the comfort of your home. The process is user-friendly and allows you to actively manage your investments.

Advantages of Trading in the Share Market

Here are some key advantages of trading in the share market:

Take Advantage of the Growing Economy

Investing in stocks influenced by economic growth can help businesses thrive. Economic growth leads to more job opportunities, increased income, and higher sales. By investing in stocks of growing businesses, investors can benefit from the overall growth of the economy.

Easy Buying and Selling Process

Buying and selling shares in the stock market is simple and accessible to all investors. You only need a Demat account, which can be opened through a broker, financial planner, or online platforms. Opening an account takes approximately 15 minutes, enabling you to quickly start your investment journey and place buy/sell orders.

Flexibility to Invest in Smaller Amounts

New investors can begin their journey with smaller amounts by purchasing stocks of small-cap or mid-cap companies in smaller units. This flexibility allows individuals with limited capital to participate in the stock market and gradually increase their investments over time.

 Liquidity

Stocks are considered liquid assets as they can easily be converted into cash at any point in time. Compared to other financial assets, stocks offer higher liquidity, allowing investors to quickly access their funds when needed.

4. Trading vs. Investing

Both trading and investing play vital roles in wealth creation. To illustrate the difference, let's consider an analogy. Suppose you and your brother bought an equal amount of seeds. You sold the seeds on the same day to earn a profit, while your brother sowed the seeds, let them grow, and harvested new seeds. By investing in the seeds, your brother also made a profit but adopted a different approach.

Here's a comparison of trading and investing:

Period

In trading, stocks are usually held for a short period, often a week or a day. Investing, on the other hand, follows a buy-and-hold principle, with investors potentially holding stocks for several years.

Capital Growth

Traders focus on price movements to book profits in trading. Investing takes a patient approach, relying on compounding interest over the years to generate wealth.

Risk

Both trading and investing involve risks. Trading typically carries higher risks due to the potential for significant price fluctuations within short time frames. Investing requires a long-term perspective and entails lower risks associated with market volatility.

Final Thoughts

When making investment decisions, investors should exercise caution and gain a basic understanding of trading and investing concepts. Acquiring knowledge in these areas helps reduce risk and maximize gains. By leveraging the advantages of trading and investing intelligently, individuals can navigate the share market with confidence and work towards achieving their financial goals.

FAQ. 

1. What are the different types of trading in the share market?

2. How does day trading work?

3. What is swing trading and how can it be profitable?

4. What is momentum trading and how can it help maximize gains?

5. How does trading in the share market function?

6. Which stock exchanges are prominent in the share market?

7. What documents are required to open a trading account?

8. What are the advantages of trading in the share market?

9. What is the difference between trading and investing?

10. How can beginners start trading in the share market?