Is there anyone who doesn’t want to get some good returns on their investment? The usual gripe from investors is that conventional financial products like bank deposits hardly fetch returns to beat inflation.
That’s where the stock market comes into the picture. Of course, the layman may be somewhat hesitant to consider the world of stocks. The equity market and its working may be intimidating for a beginner but it need not be a stumbling block for someone keen to spend time and energy to study it.
To help you enter and understand the complex world of stock trading, this article puts together the basics in a simple and lucid way.
What is Stock Trading?
At its simplest, trading in stocks is about either buying a unit or more of a company that is listed on the stock exchange or selling it. The outcome of such a transaction, also called a trade, results in either a profit or a loss.
Let’s take a real example to see how trading in stocks works.
When an investor buys 100 shares of ABC Limited, a listed entity, at $10, he has purchased the equity of the company worth $1000.
When the price of the share goes up to $20 and he decides to sell that stock, he makes a profit of $1000 and doubles his investment. The profit is, in trading parlance, called a capital gain.
Conversely, if the sale price is lesser than the purchase price, an investor would have lost money in that trade.
So, it is possible to make money trading in stocks.
Trading in Stocks – Points to Consider
Before getting into any of the technical details and strategies that can help you trade successfully, let us first explore the difference between the two main types of transactions in the stock market – investing and trading. This is important to understand to know whether you want to be an investor or a trader.
Investing vs. Trading
What is your investment horizon? Are you the type who wants to invest based on the fundamentals of the stock and of the industry and aligning your capital appreciations in line with the company’s growth? Do you see your investment as a long-term payoff that includes benefitting from the company’s performance over multiple financial years? Do annual dividends and other benefits like rights and bonuses on your stock holding appeal to you?
If so, you should be considering investing in stocks by holding them for a prolonged period.
But if you prefer a more short term but studied approach of tracking a stock’s performances and are willing to take risks while buying low and selling high, trading can be your game.
Trading works for those who have an appetite for risk, possess a passion for studying the markets and individual sectors and stocks, and can devote time and energy to tracking stock movements.
In short, investing demands an understanding of the fundamentals and trading, on the other hand, is about the shorter term and calls for both speed and caution in equal measures.
The decision to pick a stock to invest in or trade in can be a tricky one. There are many companies that are listed on the stock exchange and without studying those both at a sector and an individual level can be a risky venture.
How to Make Money While Trading?
To make money while trading in stocks, the key is to be profitable and keep losses down. There are a few strategies that successful traders follow and these can be picked up by beginners and even those with some experience.
You need an entry, hold and exit trading strategy: An experienced and shrewd trader has an entry, hold and exit plan for a stock. This is about knowing when to enter or buy, the duration to hold it and when to exit or sell it. The optimum purchase price and the projected high level to sell is what gives you a profit. Knowing the level it can fall down to and selling it, also called the stop loss, helps you to keep losses down. When trading in an online platform, these can be automated to ensure there are no manual interventions or errors.
Research and update: A smart trader is one who is well informed and keeps himself constantly updated. He also needs to have patience and alertness to continuously monitor the trends and performances. While it is important to follow the market movements, a shrewd trader will avoid the herd mentality and make his own individual decisions.
Now, what are the various steps in the process of trading in stocks and what are the tools available at your disposal to trade successfully and make money?
Full Broker vs. Online
To get started with investments and trading, you will need to open two accounts – a Demat account and a trading account. Further, find a broker registered with the security exchange as an intermediary to start buying and selling.
There are broadly two types of brokers you can choose from – either a full service one or an online broker. These brokers and online portals must be certified to trade on the stock exchange.
The full-service broker is suited for those who want help in doing the actual trading and need expert advice on what to buy and sell based on the market conditions and the individual stock performance. For this, he would charge a fee from a set fee structure that is usually on the amount of the trade done. The higher the order amount, the lower the fee.
For those who would like to do their own research and also their trades, they can select an online platform and manage their own trading. Each trade attracts a fee but these are much lesser than what a full-service broker would charge.
Of course, anyone planning to begin investing or trading will need to have a thorough knowledge and understanding of how the stock market functions. It will help to refer to the vast information bank available online or, better still, do a course on investments and trading.
Given the dynamic and the variables involved, it is just as important to stay updated on the trends of the market, the various sectors and the specific stocks themselves. The best way to keep track of financial news and updates is to subscribe to and follow financial news sources and sites.
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