Trade Equity with Confidence

Equity trading in India involves buying and selling company shares through registered stockbrokers on recognised stock exchanges such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Every transaction is subject to exchange processes, settlement and tax regulations. Equity trading is different from trading on equity, a corporate finance concept in which a company uses borrowed funds to potentially increase returns for its shareholders.

What is Equity Trading

In simple terms, equity trading means buying and selling company shares through a recognised stock exchange. These shares represent partial ownership in a company, via an established stock market. In order to buy and sell these trades, an investor requires two accounts; a demat account to store the shares in a digital form and a trading account to place buy and sell orders through a stockbroker.

The NSE and BSE trade equity shares digitally through screen-based trading and order-matching systems. Buyers and sellers place orders at their bid and ask prices, which the system automatically matches when the prices align.

How Equity Trading Works

A trader places an order with a broker, specifies the number of shares, and selects a market or limit order.

The exchange matches the order with a compatible opposing order to execute the trade.

Indian exchanges follow a T+1 settlement cycle, under which shares are credited to the buyer’s demat account and funds are credited to the seller’s linked bank account within one working day of the trade.

Brokerage, exchange transaction charges, Securities Transaction Tax and stamp duty are charged during the transaction, regardless of whether the trade ultimately turns a profit.

Types of Equity Market

Equity markets are structured around two distinct platforms. These two types of equity market determine how companies raise capital and how investors trade existing  shares.

• Primary market: A company planning to offer its shares to the public may launch an Initial Public Offering, through which it can raise capital by issuing new shares. Once the IPO closes, the stock gets listed on a stock exchange for further trading.
• Secondary market: Once shares are listed on an exchange, the existing investors can sell their holdings, while investors who missed the IPO can buy instead. The secondary market covers shares and other securities, including convertible bonds and corporate bonds. Investors usually trade these securities through intermediaries known as stockbrokers.

Types of Equity Trading

Not every equity trade follows the same timeline, and the type of equity trading an investor chooses influences both the level of risk and the time and attention required.

• Momentum trading: Trading stocks that are experiencing high movement in a certain direction and following the trend in order to make instant gains.
• Swing trading: Holding positions of a few days or weeks to gain profits from short to medium term price movements, often using technical analysis to identify potential entry and exit points.
• Scalping: Making multiple short duration trades to capture small price movements.
• News based trading: Trading on news of a company, government policy or international events that may affect stock prices.
• Arbitrage: Capitalising on price differences for the same stock across markets to seek relatively low-risk profits.
• Long term position trading: Purchasing fundamentally and technically good companies and holding them for months, with the aim of benefiting from longer-term price movements.

Tax on Equity Trading

The tax on equity trading is based on the type of activity and the tax regulations. In the case of qualifying listed equity shares that are treated as capital assets, any short-term capital gains on sales subject to STT will be taxed at 20% when transferred on or after 23 July 2024. Long-term capital gains on qualifying shares held for more than 12 months are taxed at 12.5% on aggregate eligible gains exceeding ₹1.25 lakh in a financial year. If trading income is classified as business income, different tax rules may apply.

Risks of Equity Trading

There are various market risks associated with equity trading and investors must be familiar with these risks before investing.

• Market volatility: The market can experience volatility in security prices because of changes in the company, economic conditions, geopolitical activities and the general market situation.
• Capital loss: Selling securities at a price below their purchase cost results in a loss rather than a gain.
• Transaction costs: Most trades involve brokerage fees, exchange transaction costs, regulatory costs, taxes and other charges which can reduce overall returns regardless of whether a trade is profitable.
• Behavioural risks: Emotional decision making, over trading and poor risk management can negatively affect an investor’s returns.
• Liquidity risk: Some securities exhibit reduced liquidity, which may affect price discovery and the ease of executing an order.

Equity trading in India requires a demat account, a trading account and an understanding of market rules, settlement cycles and applicable taxes. Your trading style, whether intraday, delivery, swing or positional, also affects how you approach the market. It is equally important to distinguish equity trading from trading on equity, which refers to a company’s use of debt to potentially increase returns for shareholders. Learn about equity trading services with Religare Broking to explore available trading options and tools.