What Is Stock Trading?

IIFRA Indian Institute of Financial Research & Analysis

What is Stock Trading and How Many Types Are There?

Trading means a trade in which one asset or item is exchanged for another. The main reason behind doing this exchange is to earn some profit by both the parties. Trading is done in almost every type of market such as the market for selling everyday goods, Forex market, stock market, business trading etc. Trading started when people did not have resources like money available and they made their living by exchanging the things they needed with each other. As time changed, instead of exchanging one thing for another, trade started being done with money and the profit earned also started being measured in terms of the money earned.

Trading is a basic and most heard concept in the world of finance. If you are new to the share market then it becomes important for you to understand trading. In today’s article, we will completely understand the concept of stock trading and take a complete look at its types and how to do it.

What is Stock Trading?

Trading in share market means buying the stock of a company at a lower price and selling it at a higher price or selling it at a higher price and buying it at a lower price, which is called short selling. People who trade in the share market are called traders. For example, suppose Reliance’s share is trading at Rs 2100 and there is a possibility of its price increasing in future due to chart pattern or some news. You can buy that share at the current price of Rs 2100 and suppose after 2 days its price becomes Rs 2300. Now you can sell the purchased shares and earn the difference in price as profit.

There are mainly two types of trading, short term trading and long term trading. People who want to make quick money from the market mostly try their hand in short term trading. Long term trading mostly involves investing and holding positions in stocks for a long time.

How many types of stock trading are there?

As already mentioned, there are mainly two types of trading and under them there are different categories of trading, which are:

Intraday Trading

Intraday trading means buying and selling shares of a company in the same day. If someone does intraday trading then he has to sell the shares before the market closes on the same day of purchase. If you do not do this, then as per SEBI guidelines, your broker automatically closes the position by selling the shares and in such a case you may have to pay some penalty.

  1. Intraday trading is mainly done by analyzing chart patterns in small time frames, such as 5 or 15 minutes.
  2. In this, the main objective of the trader is to capture the move of half to 1 percent.
  3. Intraday is the most popular form of trading and the main reason behind its popularity is the amount of money lent by the broker to do it, hence it is also called margin trading.
  4. According to the new rules of SEBI, the margin given can be up to 5x, that is, if you have Rs 10,000 in your trading account, then you can trade up to Rs 50,000 with it.
  5. You can do intraday trading in any stock which has good movement and volume.
  6. Due to margin, you can earn good profits even with less money in intraday, but the possibility of risk and loss is also the same.

Scalping

Scalping is a form of intraday trading, the only difference is that it is done in a very small time frame which ranges from a few seconds to a few minutes. In Sculpting:

  1. An attempt is made to capture very small movements of a stock or asset.
  2. In this, trading is done in large volume or large quantity of shares so that even small moves can make big profits.
  3. In this, trade execution is done very fast and many trades can be taken in a day.
  4. Mostly chart time frame of 1 to 3 minutes is used in this.

Swing Trading

In swing trading, the stock is held for a few days to a few weeks, that is, delivery of shares is taken in it, due to which no margin is available in it like intraday trading. In this, traders analyze the charts on a timeframe ranging from 1 hour to 1 day and enter into a trade as per the patterns seen in them. In swing trading, the profit potential is usually 5% to 20%. Compared to intraday and scalping, this is a much safer form of trading and in this the trader does not need to keep looking at the screen all the time.

Positional Trading

In positional trading, traders hold a stock for several weeks to several months and the target of profit is more than 15% or 20%. In this, chart patterns are analyzed in daily and weekly time frames and the fundamentals of the company.

Arbitrage Trading

Under arbitrage trading, the trader earns profit by trading one asset in two different markets. There is some difference in the prices of the assets which are being traded in different locations as per their market sentiment, liquidity and time zone and traders take advantage of this to earn their profits. For example, a stock ABC is listed in both National Stock Exchange and Bombay Stock Exchange. Due to many factors, the stock price in NSE is higher than BSE. In such a situation, a trader will buy the stock at a lower price on BSE and sell the same quantity at a higher price on NSE. Whatever amount remains after settling brokerage, taxes and other charges will be his profit. Arbitrage trading is done in almost all types of asset markets such as stocks, bonds, currencies, commodities and derivatives etc. A trader must be quick to take arbitrage trades because the profits are temporary and all trades have to be completed in a limited time.

How to learn stock trading?

Nowadays, there is a lot of content available on online social media to learn share market. You will get a lot of important information related to share market on our site also. You can also gather basic information about share market by reading the blog written by us. Apart from this, you can use these methods to learn and practice share market:

Paper Trading: Paper trading means that method of trading in which you can trade in any stock without actually buying it. It is exactly like real trading but no real money is involved in it. This is the best way to practice before actually trading in the share market. There are many apps available online for paper trading such as FrontPage.

Trading Books: Only the one who is an expert in that field and has a good experience in that field can teach you the most about anything. There have been many such veteran traders in the share market who have earned a good fortune due to their skills and right mindset and have passed on their experiences to us in the form of books. By reading these books you can gather good information about share market and trading. You can know about some such popular books in this post of ours.

Online Learning: A lot of free information about share market is easily available online. There are many such sites and apps using which you can get complete information about the share market from basic to advanced.

Also see Top Stock Market Courses in Delhi NCR:

Conclusion

In the end, I would like to say that trading in the stock market looks complex but if done with the right mindset, it is quite easy. Like any business, trading also takes time to establish itself and become profitable, so do not take shortcuts, understand it completely and keep improving your skills with patience.