What is Stock Trading? Important Strategies for 2023
Created on 13 Oct 2022
Wraps up in 10 Min
Read by 4.5k people
Updated on 03 Dec 2022
I firmly believe in the saying, “Great things are done by a series of small things done together”. So, before we started looking for what stock trading is all about, we thought it might be worthwhile to sharpen our understanding of the words ‘stock’ and ‘trading’ individually.
A stock is a type of investment that denotes ownership in a portion of a particular company. On the other hand, trading is a process that governs all economic and financial activities in the form of the exchange of commodities and services between two entities.
Now, if I consider a market to be a location categorised according to the type of items sold, I can say that a stock market is a location where stock trading occurs.
Meaning of Stock Trading
But before juming to what Stock Trading is first we should understand that there are generally two types of markets:
|Organized Market||Unorganized Market|
|It has rules and regulations that any entity operating within must follow.||Unlike its counterpart, this market type has no tight regulations; even if it did, compliance is not required.|
|It often has a regulatory agency to ensure that these laws are followed.||Very rarely do we see regulatory agencies overseeing the transactions in this marketplace.|
By its very nature, the stock market falls under the first category, and in India, the Securities Exchange Board of India (SEBI) regulates all its transactions. Let me now dive deeper into stock trading!
As indicated above, stock trading is buying and selling shares of a company to profit from daily price fluctuations. Owning these stocks entitles one to own a portion of that particular business.
In general, stock traders could broadly be put under these 3 categories:
1. Knowledgeable - I got this , it’s a known tough, but I studied for this and did some research. (The risks taken here are all calculated.)
2. Uneducated - Well how hard can this be! The guy in neighborhood did it and he’s quite successful. I will be just fine. (The risk is really high.)
3. Intuitive - Well I really “feel” like this company will give a huge profit. (This entirely depends on luck.)
Those who are good at stock trading actively follow the price movements of their portfolio stocks and subsequently attempt to purchase cheap and sell high (like a retailer). Stock traders differ from regular stock market investors in regards to a long-term perspective on the market.
Trading stocks comes with the risk of significant losses, but in hindsight, it can give rapid returns to those who time the market right. No brainer!!
According the latest report by BSE and NSE, these are number of active traders in India for the FY 2022-
Advantages and Disadvantages of Stock Trading
Winning and losing are a part of life as well as a part of the stock market. Who would have thought that the land of spirituality would move towards capitalism so drastically that Stock Trading would become the new daal chaawal?
Disadvantages of Stock Trading
● Risk - Stock trading has remained infamous throughout history for the risk it bears. An uncalculated risk can harm you financially. A trader could lose all of his investment within a few hours in stocks.
When a company faces a downfall, its investors start to sell their shares, which causes stock prices to plummet. If an investor does not want to risk all at once, they should invest in government bonds and securities, and equities. This creates a balanced portfolio.
● Emotional Ride - Anyone who understands the basics of stock trading knows how the prices of the shares fluctuate within seconds. This causes greed among the traders as they buy large amounts of stocks and then sell out of fear when they see the market fall.
Due to this, the traders go through roller coaster rides of price shifts. The best way is to keep a constant check on the prices and the trends in the market.
● Volatility - The stock trading market is volatile in nature. There are constant movements and reactions in the market. In one day, stock prices can rise as high as they can, then plummet.
These movements cannot be forecasted accurately at all times and create an element of high risk for the traders. However, the chances of a huge loss are not something that occurs every day, but if witnessed a crash, then it may take years to recover.
But roller coasters are what make theme parks so fun, right?
Advantages of Stock Trading
● Ownership/share in the organisation - When a person holds a position for stocks of a particular company, they own a part of the ownership. This gives a trader the power to vote on the company's decisions keeping in mind the interests of the investors in the market.
● Higher profits in the short term - Since inception, stocks have been able to satisfy and give higher returns to traders in the market as they patiently invest their money and give it enough time to grow. Moreover, the Indian stock market has been able to give higher returns to its investors and traders, outperforming all other financial investment tools.
● Dividend Income - Being a stockholder of a company gives the advantage of earning its dividends too. These are paid quarterly, sometimes annually, if the company decides to distribute the profit among the shareholders. If the dividend is consistent and growing, it indicates that the stocks of the company are stable.
● Tax Advantages - LTCG (long-term capital gains) tax is charged at 10% p.a. when an investor earns a profit of more than ₹1,00,000 from holding stocks and mutual funds. The easiest (and legal) way to be exempted from paying this tax is by selling the holding just before the it becomes ₹1,00,000.
Which strategies to implement while stock trading for beginners?
Before I talk about the stock trading strategies for beginners in the market, it is important to understand that trading is not just buying and selling stock. In fact, it is buying and selling stocks in the trade market to capitalise on the stocks with the best possible strategy to cater to the fluctuations in the prices of stocks on a daily basis.
Trading in stocks is a strategy-driven process as the stocks are volatile in nature and demand multiple dynamic strategies that cater to the market's current situation. Here is how the number of traders transacting in NSE and BSE has gone up over the last few years-
I believe that having only one strategy for all types of stocks would not give the best results. (Been there, done that.🥲) Instead, strategies based on the current dynamics of the market and having a stock-specific focus would bring the optimal result expected from trading.
Some of the methods that are common in the stock trading market are -
1. News Trading Strategy (Mass media for stocks)
As the name suggests, this trading is about the suggestions presented by the media and news channels during the pre-market hours, throughout the day, and after the day.
- Each news release done by the media and each market should be considered an individual entity.
- Focus and build strategies based on a particular set of news releases and not on all.
- More than the news release, the expectations and the reaction play a vital role in implementing the news trading strategy.
2. Day Trading Strategy (It's not a hobby anymore)
Also known as intra-day trading, it is most suitable for traders who like to remain active during market hours and dedicate a good number of hours, like a full-time profession, to trading.
- Limited risk through the day trading strategy, as one opens short-term trades which last for a few hours. It remains open for one to four hours, which minimises the risk on prices during the day.
- There is no place for overnight risk. As traders depend on the movements between the opening and closing hours of the stock prices.
- This day trading strategy is for traders who wish to be opportunists and serve multiple positions during the day and enjoy flexibility.
3. End of the Day Strategy (Wait for the finale)
As the name suggests, this strategy is based on trading at the end of the day..
- Less commitment of time is required. A trader needs to study the opening and closing prices of the stocks. One just needs to analyze the charts and make orders either on opening or closing, which does not need a significant amount of time during the day.
- Most suitable strategy for amateurs as one does not need to enter multiple positions.
4. Swing Trading Strategy (Researchers)
This strategy is used for traders who study the movements of the financial market and trade on both ends. If the market is going on the rise, these traders aim to buy the securities. However, if the traders speculate that the prices are going to fall - they sell their stocks.
- This type of strategy, as per my understanding, gives ample opportunities to the traders. As one gets to play from both sides, which allows traders to go short and long through various securities in the market.
- The swing trading strategy is a more suitable type of trading for people who can dedicate a minimum time of the day and want to pursue it as a hobby or a learning experience. However, one should study and analyze before trading with this strategy.
5. Trend Trading Strategy (Take it while it's hot)
Some traders believe in going with the ‘trend’ of the market’s current situation. This strategy is used by individual traders who analyze the market and study the trend of the stocks. It is popularly said in the industry that - “trend is your friend” (or is it?).
- Always decide the pattern and time period in which a trader wants to follow the trend. Be consistent with the pattern to bring the best return from the strategy.
- Being ‘alert’ is the mantra for this strategy. One should always know when the trend is about to change and bring in a new trend in the market.
6. Position Trading Strategy (In for the long haul)
This type of trading is among the most popular strategies in the market. Under position trading, as the name suggests, the traders hold a position for a longer tenure. This can be as long as a few months or even years.
There is less stress, as one trader need not be required to study the trends and analyze the market on a daily basis. In such trading, the profits of the traders are usually high. Why? Because the position trading allows individual traders to leverage high on the stocks and make lesser mistakes.
However, some of the disadvantages of the position trading strategy are -
- A significant chance of loss is present in the position trading strategy. Most of the traders following this strategy ignore the minor fluctuations in the stocks. These minor changes may often become trends and continue for a long period resulting in a loss.
- SWAP! It is nothing but a commission one has to pay to the broker of the stocks. As the stocks remain held and open for a long span the amount of maintaining this can accumulate into a larger sum.
7. Scalping Trading Strategy (The underdog)
A scalping strategy trader is someone who holds a position for a short term with minimal price fluctuations and movements. The aim of such a trader is to earn a large number of small profits in order to accumulate and turn into a large sum of profit.
- There is no chance of having to bear any overnight risk. Scalpers do not hold multiple or any position overnight. In fact, they hold positions only for a few minutes at max.
- One will get various trading opportunities as a scalper. There are various small positions held by them for a short span, due to which fewer criteria are defined. Making higher opportunities for traders to venture into.
- It is most suitable for people who take up trading only as a hobby or as something to learn due to its flexible nature.
How to Learn Stock Trading?
Most of us have seen movies, news, and web series showing stocks and their success or failure. But no one talks about how to start stock trading or how one can learn stock trading.
Here are a few suggestions that can help one understand the basics of stock trading and kickstart their stock trading journey.
- Invest in safer stocks initially. Reason? Investing in highly volatile stocks at an early stage may lead to loss due to a lack of knowledge. This will lower the confidence to invest and do stock trading. If one starts with safer stocks, the start may be slow but will be steady and bring good returns.
- Build a diversified investment stock trading portfolio. Investing in various types of stocks and industries is essential as it reduces the risk and boosts the overall performance of the stocks. The simplest way to create a balanced portfolio is to invest in mutual funds or ETFS.
- Study and understand the fundamentals of stock trading. Learn about the various strategies and analyses that traders do to forecast the movements in the market.
- Get a mentor! Stock trading is an unpredictable world ; it is impossible to forecast the market even for experts accurately. So, it's always advisable to learn and take help from an expert or an experienced trader. It will allow a beginner to understand the market and make correct decisions during the initial stage of stock trading.
The Botton Line
It's a time when everyone is trading in our country. India is heading towards capitalism (FINALLY), and we’re driving towards money. Highly influenced by Shark Tank, Scam 1994, it's the beginning of a phase towards a financially driven lifestyle.
But it's a well-known fact that higher prizes demand higher risks, and it's a common phenomenon to see a person or a company go bankrupt. Investing is completely up to you, but it's best to know the advantages and disadvantages it brings with it.
In a constant urge to earn more and earn quick, trading seems to be gaining impetus in the country.
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