What Is Stock Trading And How To Trade Stocks?
When traders look to capitalize on the short-term price fluctuations in stocks by buying and selling shares within very short timelines, it’s called stock trading. Traders try to buy stocks experiencing a bull momentum and sell them at highs. And the strategy with stocks in bear momentum is to sell at highs and buy when the stock price corrects, all within a few minutes to a week. Stock trading is often affected within the same market sessions, i.e., an opposite trade order is placed on the same day. This approach varies from stock investing where investors use a buy and hold strategy for long-term wealth appreciation.
Stock traders focus more on the technical factors such as price movements and chart patterns than tracking the fundamentals of companies that have a longer-term impact; chart patterns are more current and talk about the present price fluctuations. Read on to get a detailed account of stock trading!
What is Stock Trading?
Stock trading refers to buying and selling stocks within short timelines, often within the day, with the motive of reaping immediate rewards. Stock trading has a massive potential of rewarding traders with impressive short-term gains. However, the potential risk of losses cannot be overlooked. Thus, only people with a generous risk appetite may consider stock trading. Stock trading involves high transaction costs as it involves frequent selling and buying of shares, and for each such transaction, you are charged a transaction fee – brokerage, STT etc.
5 Types of Stock Trading
There are five approaches to equity trading. Though the ultimate aim of each of the approaches is to earn a profit, their modus operandi is unique in each case. Following are the types of stock trading:
1. Day trading
Day traders take stock positions and square them off on the same day irrespective of the returns earned. Day trading involves taking trade positions for a few minutes to a few hours. Day traders play on very small fluctuations in stock prices, and such a style of trading doesn’t allow them to carry overnight positions.
Day trading requires an in-depth knowledge of the market and a grasp of the volatility game that makes it highly risky. The trader must fix their gaze on their system screens during the market hours to catch the right price points to affect the trade before the price moves.
2. Scalping
If you think day trading has a small time frame, the concept behind scalping will certainly astonish you. Scalping is a type of trade where the position is held for just a few seconds to a few minutes, not more than that.
Scalping is a suitable trading strategy for range-bound stocks. Scalpers take the help of price action to determine the upper and lower range of such range-bound stocks. Buy orders on a scalping trade are taken at the lower range, while sell orders on a scalping trade are taken when the price nears the upper limit. Scalping is also known as micro trading because it involves entering multiple trades quickly. This means you may open and close your position multiple times in the same stock or a different stock, within even a minute (if you can!)
Scalping requires quick decision-making skills, awareness of market fluctuations, and experience. Precise entry and exit are essential for scalping.
3. Swing trading
Involves trading stocks with an investment horizon of a few days to a few weeks with a motive to capture short to medium-term price movements. Swing trading involves overnight and sometimes weekend risks. Traders try to preempt the short- to the medium-term movement of stocks using technical analysis and trade in the direction. Swing traders set targets and stop losses on trades according to their technical analysis or the technical indicators they follow.
Suppose one believes a particular stock will bottom out from one of its important support levels, the trader will take a buy swing trade on the stock to purchase the stock during the dip. A target will be set at or near the recent high and a sell order will be placed.
4. Momentum trading
Momentum is the pace at which stock prices accelerate. Momentum trading is based on the premise that a rising or falling trend in stock price will continue for a particular time frame. Traders buy stocks already in buying momentum and go short on stocks experiencing a downfall. Strong momentum is expected to continue regardless of small retracements unless there is a confirmation of trend reversal. Momentum trading involves using volume and momentum indicators like MACD, VWAP, etc.
5. Positional trading
This is also called buy-and-hold trading. It aims to make the most of long-term price movements in stock prices without giving much importance to short-term volatility. It is suitable for passive traders who cannot invest much time in the market. Positional traders are backed by a mix of technical and fundamental analysis. The time frame for positional trades ranges from weeks to months. Some traders keep holding their positional stocks until their targets are achieved or trailing stop loss is hit.
Also Read: What Are The Differences Between Trading & Demat Accounts?
How to Trade Stocks?
Given the high quantum of risk involved, stock trading is not everyone’s cup of tea. Even though the process is fairly simple, if you don’t follow the correct procedure, you may be inviting trouble for yourself.
1. Select a stockbroker
Open a Demat account with a broker that suffices your trading needs. Beginners may want to seek out brokers that charge the low brokerages and have a simple user interface. Your stockbroker will be responsible for placing all your buying and selling orders at the exchange. Additional services like demo accounts, education content, customer support, and device compatibility could also form the base of your selection.
2. Have a trading plan
You must know your expectations from your trades. Aspects like entry, target, stop loss, exit, adjustments, etc., should be pre-decided. You must also know what percentage of your trading capital to deploy in each trade. Trades should be backed by informed fundamental and technical analysis and not based on just pure instincts.
3. Learn how market orders and limit orders work
You’ll be baffled to find the variety of options on the order page. However, to start trading, you must know the market and limit orders.
- A market order is executed almost instantly at the best available price.
- A limit order only gets executed at the price you are willing to pay or if a more favourable price is available.
4. Dry test your trades to measure your efficiency
It’s not advisable to jump into stock trading with all guns blazing. Dry test or paper trade on some stocks initially to understand how your trading plan works for you. Many brokers offer demo accounts, or you can try any of the virtual trading simulators to test your trading skills.
Where to Trade Stocks?
To trade in stocks, you will have to first open a brokerage account with your preferred broker. There are two types of brokers:
- Full-service brokers: They offer a variety of services like market research, trading tips, educational material, financial advice, etc. apart from allowing you to buy and sell stocks. They charge a certain percentage on each trade which ranges from 0.3% to 0.5%. Examples of full-service brokers include Trustline, Angel Broking, IIFL, ICICI Direct, HDFC Securities, etc.
- Discount brokers: These are the new age brokers that charge a nominal, flat fee on each trade which ranges from Rs 8 to Rs 12. The services offered by these brokers are not extensive, and they only allow buying and selling of stocks. Examples include Zerodha, Groww, 5Paisa, IndMoney, etc.
Based on your requirement, you can choose any broker as a platform where you can trade in stocks.
Advantages of Stock Trading
Here are some of the top benefits of stock trading:
- Can help generate wealth in a systematic way and gives great returns within a considerable period.
- When you invest money in a company, you become a shareholder and retain minority ownership in the company.
- You can start with as low as Rs 10 to trade in the stock market with penny stocks.
- Investing in stocks is the best way to beat inflation, thanks to its rate of return, which is higher than inflation.
- There is no lock-in period for stock investments and you can liquidate your investment whenever you want.
Disadvantages of Stock Trading
Here are some of the disadvantages of trading in stocks:
- Stock investments come with some amount of risk.
- You need to have a long-term investment horizon for stock investment to pay off.
- You need to have some understanding of how stock markets and investments work in order to reap the benefits of stock trading.
- The stock markets are highly volatile; the sharp surge and dips in stock prices can be a rollercoaster ride for many investors.
- The high brokerage charges by some brokers and inefficient tax planning can put a dent in the gains made via trading in stocks.
Also Read: Ways To Invest In The International Stock Market
How to Minimise Stock Trading Risk?
Stock trading is a risky venture, and there’s not much room for errors. A couple of loss-making trades, and soon, your confidence will hit rock bottom. Here are some tips to keep the risk to a minimum.
- Take care of position sizing: do not deploy all your trading capital in a single trade. Only risk the capital you can afford to lose while still having the capital to trade.
- Never trade without stop losses: markets can turn upside down within minutes. You might have a high conviction on your trades, but it’s always wise to place a stop loss. Your risk-to-reward ratio ideally should be favourable. For example, if you are willing to take the risk of Rs 100, you may have a target of Rs.180-200, but more importantly, you need to place the stop-loss at a price that is Rs.100 less.
- Never trade on tips: every third person is a market expert in India. You should never trade on tips provided by stock forums, telegram channels, YouTubers, etc. Trade stocks that you have tracked personally, both fundamentally and technically.
Make the best of your losses: your loss-making investments can help you save on your tax liability. Tax-loss harvesting can be done to trim down your tax liability. In tax-loss harvesting, loss-making positions are sold near the end of the financial year to set off the profits against your other incomes.
Final Word
The potential benefits of stock trading might be tempting. Stock trading can turn your fortunes if you have learned to decipher the price action of stocks. However, it’s not the place for the faint-hearted. The risk of the capital loss is among the biggest disadvantages of stock trading. Risk-averse traders should avoid taking huge positions; instead, they can invest in mutual funds.
FAQs on Stock Trading
Ans: It depends on your trading style and your expectations from the broker. However, beginners should open their Demat account with brokers having a simple interface and charging low brokerage.
Ans: Yes, you can. There’s no minimum requirement for stock trading, and you can trade stocks with Rs 500 provided the last traded price for that particular stock is below 500.
Ans: Stock trading is done with a myopic view. The motive is to cash out short-term profits from price fluctuations in stock prices. However, Investors invest in the growth of companies to benefit in the long run, and investing is less risky than stock trading.
Ans: The Indian stock market is open from Monday to Friday from 9:15 am to 3:30 am. You can enter your day trades anytime during the market hours.
Ans: Yes, stock trading has the potential to make you win tons of money just by trading. There are already numerous examples of traders who made money by trading stocks. However, that requires a lot of discipline and in-depth knowledge of the stock market. That said, only a handful make money trading stocks, and the rest end up on the losing side.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
