Trading is the act of buying and selling financial instruments, like stocks, currencies, or commodities, with the goal of making a profit from price fluctuations within a specific timeframe. It is the fundamental law of every economic system. Any country’s growth capacity depends on the trade taking place in it. All kinds of commercial transactions occur in markets, including the stock exchanges for share trading.
Markets can be of two types: structured and unstructured. Every transaction taking place in the structured market must follow a set of rules and regulations that a regulatory body monitors for compliance. On the other hand, unorganised markets do not have such compliance obligations. Thanks to the structured markets going online, trading has become more convenient not only for institutional traders but also for retail investors. When trading currencies in the financial market, you gain exposure to international currencies like the Japanese Yen and US Dollar, global markets like FTSE 100 and S&P 500, and commodities like cattle and oil.
There are various financial assets available for trade in the marketplaces, including the following:
Equity: Aim for wealth creation and long-term growth with investment in equity.
IPOs: Invest in a company IPO with high growth potential and get good value to boost your portfolio.
Mutual Funds: Start buying and selling mutual fund schemes just like shares.
Commodities: Dig Ddeeper with objective research and pick the right commodity with strong returns.
Currency: Take advantage of exchange rate fluctuations by investing in currency.
Bonds: Looking for a conservative and safe investment option? Put your money in a predictable bond with an element of stability.
Futures & Options: Futures & options are low-risk methods to invest in the futures market and make quick money
Insurance: Invest in insurance to protect your family, save on taxes, and plan for retirement with affordable premiums.
Corporate FDs: Corporate FDs provide higher returns than bank FDs with better protection, like fixed-income instruments.
To start trading, you must sign up at a brokerage platform that gives access to the structured financial markets. Studying these markets shows whether an asset’s rates will fall or grow. The basic idea behind trading is to buy an asset at a lower price and sell it later with a profit margin. Additionally, these platforms also guide new investors to get acquainted.
History of Trading
Trading has been a part of human civilisation since the agricultural revolution. However, the form of trading has changed across ages and societies. Isolated communities do not support unification into single systems. The earliest form of trading was the barter system prevalent in almost all communities. In this system, traders traded goods and services in exchange for other goods and services they required. Traders soon found this system inconvenient due to the lack of basic standards to determine a product’s value.
Later, authorities created money to standardise the value of all products and services. Consequently, a chain of financial and economic developments took place, leading to the introduction of share trading, credit facilities, etc. Share trading started with the formation of European joint-stock companies that played a pivotal role in the country’s imperialism. Unofficial stock markets started burgeoning in several European cities. Dutch East India Company became the first joint-stock company in 1611 to trade its shares publically on the Amsterdam Stock Exchange. In the late 1700s, a small group of merchants created the Buttonwood Tree Agreement, where they met every day to buy and sell stocks, later forming the New York Stock Exchange. In 1971, trading began on the US stock exchange.
As increasing joint-stock companies fostered economic growth with geographical spread out, they stayed back in the financial markets to continue trading. Bombay Stock Exchange was the first trading exchange in India and Asia, established in 1875. In 1991, the Indian government set up the National Stock Exchange under a team of five prominent members, including Raghavan Putharan, Ravi Narain, Ashish Kumar Chauhan, Chitra Sankaran, and K Kumar. Today, BSE and NSE are the two primary houses exchanges where trading takes place.
Types of Trading
There are two types of trading you can perform in the share market. These are as follows:
1. Domestic Trading
Domestic trading refers to the transactions of assets within a nation. In this type of trading, the sellers and buyers of assets belong to the same country and exchange commodities. Also known as the internal market, the losses and profits largely depend on domestic market fluctuations. Domestic trading can further be of two types:
Wholesalers working as middlemen between stoke stock issuers and brokers carry out this type of trading. Companies issue their shares in bulk quantities to wholesale traders. In turn, wholesalers sell them to retail brokers, who go on to sell them to individual investors.
Retailers carry out retail trading and basically work as middlemen between wholesalers and individual investors. Wholesalers sell stocks in bulk quantities to retail brokers, and retailers sell them to individual customers looking to invest in shares.
2. Foreign Trading
Foreign trading is the exchange of assets across international territories and borders. Since the currency value differs between countries, investors investing in foreign assets earn higher returns than domestic trading. In most economies, foreign trades represent an important share of their GDP. Foreign trading can also be of two types:
Import trade means purchasing assets from foreign markets, placing the buyer on the trade’s receiving end in a country. For instance, if an Indian investor buys an asset in the foreign market, it is an import trade where the buyer pays for the purchased asset.
Export trade happens when an asset holder sells an asset to a buyer in another country. In other words, they stand on the giving end of the export trade.
Benefits of Trading
A trader can work for a financial institution, trading via company funds or credit. Alternatively, they can also work for themselves, trading with their own credit or money. In this case, they can keep their profit to re-invest or achieve financial goals. Below we have listed a few benefits of trading in the stock market:
Leverage the Growing Economy
Under growing economic conditions, earnings also grow. Economic growth generates more employment opportunities, increasing sales and income. Thus, investors placing their money in business stocks raise their own funds as well as the company’s, leading to overall economic growth.
Easy Trading Process
Stock trading is a simple way to generate returns for all types of investors and traders. All you need is an online Demat account that you can open with a financial planner, broker, or online brokerage firm. Setting up such accounts hardly takes 10-15 minutes, and you can start your investment journey almost immediately. Once you set up an account, you can place buy and sell orders to earn profits and build a corpus.
Flexibility for Smaller Investments
New investors with low-risk appetites can start with small amounts according to their affordability. They can purchase smaller unit stocks in small or mid-cap companies, get an idea of how the market works, and increase their investment capacity gradually.
Compared to other types of financial assets, stocks are highly liquid assets that you can easily convert into cash at any point you want.
How Does Trading Work?
Any retail investor, financial professional, or investment firm can engage in trading. The ultimate goal of any trade is to buy stocks at a lower price and wait for the right time to sell them at a higher price. When you want to trade in the stock market, you may approach a financial advisor or open a Demat account online to handle it yourself. No matter how you place the buy or sell order, every trade on the stock exchange is now handled digitally.
While trading, you can place different types of stock orders, including the following:
Market Orders: Buying or selling shares at the price of order placement
Limit Orders: Involves specifying a price at which the trader wants to buy or sell a stock
Stop-Loss Orders: Sells a stock when its price goes below a certain price, preventing any further loss
Day-Only Orders: Effectively only on the day of buy order placement
Good-Till-Cancelled Orders: Remains open until the trader cancels or carries the order out
Day trading is an aggressive form of trading that takes place during a single trading session. Since it aims at generating profit from short-term stock price changes, it carries a higher risk than other trade types. Buy-and-hold investments aim to purchase stocks when the price is low and hold them for extended periods until their prices increase profitably. This form of trading avoids the effects of short-term market fluctuations and focuses on long-term growth potential.
Ways of Trading
There are several ways of trading in the stock market.
1. Day Trading
This type of trading involves buying and selling shares within a single trading session. A trading day starts at 9:15 am and ends at 3:30 pm on a weekday (except market holidays). Day trading involves holding stocks only for a few hours or even minutes. A day trader must close the transaction before the market closure. Therefore, a popular trading method capitalises on small stock price fluctuations.
Day trading often requires a complete understanding of market matters and a keen sense of predicting market fluctuations. Therefore, it is a common form of trading that experienced traders and investors participate in.
Scalping or Micro-Trading
Scalping reaps dozens of small profits on a single market day. However, every trade does not necessarily generate profit. Sometimes, the gross loss may exceed the trader’s gains. In micro-trading, the holding period is shorter than day trading, spanning for a few minutes maximum. Like day trading, micro trading also requires market awareness, an idea of fluctuations, proficiency, experience, and promptness to transact.
This type of trading capitalises on short-term patterns and trends in the stock market. It earns gains profits within a few days of buying a stock, ideally ranging from 1 to 7 days. Traders analyse the stocks, gauge their movement patterns, and execute them properly to achieve their investment goals.
As its name suggests, a trader earns profit based on the stock’s momentum. The trader identifies a stock with a high potential to break out. The goal is to buy such stock when the momentum goes downward, hold it for some time, and sell it as it gains an upward momentum.
Position trading requires traders to hold securities longer until they can capitalise on their long-term potential. It is a suitable trading style for regular market participants and non-market professionals.
What is Online Trading?
Online trading means trading assets through online platforms. Stock brokers let you trade online through their trading platforms. All you need is to open a Demat account with them and link it with a trading account. Brokers buy and sell shares via market exchanges and charge a commission from you for their service. These brokers have the license to perform stock trading on the exchange. In today’s digital age, most investors and brokers prefer trading online.
The stock exchange is like a warehouse where people sell and purchase shares. In online trading, brokers place buy or sell orders by matching buyers with sellers. The sale of stocks takes place electronically, and the Demat account keeps them stored in dematerialised form. Online trading platforms stay updated with digital advancements and give a fruitful trading experience to investors.
Impact of Online Trading
Online trading has made share trading extremely fast and simple. Since almost everyone has internet access these days, they can trade with just a few clicks from anywhere at any time. Therefore, online trading is pivotal in an investor’s or trader’s life. It facilitates trading financial instruments on an online platform, including derivatives, shares, ETFs, bonds, equities, mutual funds, etc.
Earlier, when investors wanted to buy shares, they had to call their broker and request to place a buy order. Order registration used to happens only after this tedious process. But now, they can quickly log in to their Demat account and place the order without calling a broker. All in all, online trading gives a hassle-free experience to traders, saving their effort and time significantly. Online trading also saves the money they had to spend on broker fees and commissions. The online fees they must pay now are much lower compared to earlier. Moreover, they retain complete control over their assets with regular monitoring and any-time trading.
Who Trades and Who Invests?
To understand who trades and who invests, you must first understand the difference between trading and investing. Traders earn profit by buying an asset at a lower price and selling it when the price goes higher than the purchase price. Since traders speculate on the bullish or bearish market price movements, they do not own the underlying asset.
On the other hand, an investor buys an asset at a lower price, owns the asset, and sells it at a higher price to make a profit. They hope the market price will increase over time, which gives them profit through the price difference. Investors also earn income through dividends if a company issuing stocks grants them. Moreover, they have voting rights for the shareholders.
Traders and investors are different. Although both aim at buying and selling securities to earn a profit, traders prefer using derivatives and leverage to trade on various markets. Institutions, governments, and retail traders like individuals become active in the financial markets by buying assets when the price is low and selling them when it goes up to make a profit.
Some traders fill their portfolios with a particular asset class or instrument, while others diversify their trades across securities and commodities. Institutions and governments can adapt to the changing situations more rapidly as different departments work for them to focus on various trading industries and sectors. Institutions are the biggest market participants, with a large percentage of trades belonging to them.
When an individual wants to invest in the stock market, they must approach a stockbroker to execute the trade. These stockbrokers are experienced in performing the transactions, helping their clients earn maximum profits. They use their research, study trends, read charts, and do due diligence before acting on their client’s behalf. Retail traders perform these actions from their private accounts. They fund these accounts with their own funds, bearing the risk of losing the capital.
Trading institutions include hedge funds, corporations, and commercial banks that influence the stock market’s volatility and liquidity. On the other hand, investors are single individuals who use their Demat accounts to trade stocks using their trading and bank accounts. Both entities profit from political instability, currency availability, interest rate fluctuations, supply and demand of products, etc.
How to Start Trading?
To start trading, you must have a Demat account and a trading account with a licensed stockbroker. The first step is to find an online stockbroker that can open a Demat and trading account for you. A Demat account stores the stocks you purchase in digital format, while a trading account lets you buy or sell them. When choosing a stockbroker, consider their account opening method, charges, and other terms and conditions. After selecting a reliable stockbroker, log on to their website to open a Demat account with them. You just need to provide a few necessary details, KYC information, and bank details to open a free Demat account.
After verification, your Demat account will become active. You can add money to your trading account and view live stock prices online. Select a share with growth potential and place a buy order according to your budget and risk appetite. Monitor the share’s price and place a sell order when it reaches a profitable level.
Pros and Cons of Trading
Successful trading depends on your ability to place buy and sell orders wisely rather than your communication and other skills. Timely payment and no default make trading even more attractive. While trading has several advantages that investors can enjoy, it also has disadvantages. Let’s look at the pros and cons of trading in the real scenario:
Pros of Trading:
Good Returns: Trading is highly lucrative, with a high potential for good returns for traders with sound analytical skills.
High Liquidity: Stocks provide more liquidity than other asset classes like real estate. That means selling them and getting out of the stock market is much easier.
Regulated Framework: Stock markets work under the strict surveillance of SEBI that thwarts any possibility of malfunctioning or scams.
Transparency: Since it allows traders to buy and sell assets directly through their Demat and trading accounts, they can know their order’s status in real time and execute the trade without any middlemen involved.
No Conflict of Interest: SEBI clearly outlines procedures to prevent conflicts between customers and proprietors.
Cons of Trading:
High Volatility: The stock market is highly dynamic and volatile. The stock prices may fluctuate greatly within a single day, impacting the price of stocks you hold.
Highly Risky: High volatility and unpredictability make trading risky, especially for beginners and small-time traders.
Malpractices: Despite intense vigilance, there are loopholes that lead to malpractices in the industry.
Impulsive Decision-Making: The ease of online trading and the requirement for small initial investments tempt beginners to make decisions impulsively. As a result, they make losses instead of profits.
To start trading, select an online stockbroker, open a Demat account, and link it with a trading account. After creating these accounts, log in to them to add funds and start trading. View information about the available stocks, choose appropriate stocks, and place a buy or sell order.
In simple terms, trading means buying and selling assets, shares, indices, forex, and other financial instruments without owning them directly. Traders hope to make a profit by leveraging the price movements in the market.
You can trade in various financial markets, including shares, bonds, ETFs, global currencies, themes, indices, commodities, etc. Your final trading product depends on your capital access, risk appetite, returns expectation, etc.
Options let investors make a profit even during volatile times, as the market is highly unstable due to the constantly moving prices of stocks, commodities, and currencies. Irrespective of the market conditions, options utilise such conditions to profit the investors who take risk with their money.