Stock Trading
Meaning of Trading
Trading is essentially the exchange of goods and services between two entities. In this context, the entities are investors/traders who are exchanging stocks of different companies. Stock trading takes place in the stock market. With online trading and investing, stock markets have become accessible to a larger section of people
Stock trading refers to buying and selling shares of an entity listed on a stock exchange. By buying a share of an entity, the trader obtains a piece of entity ownership. It is a method used in the stock market to generate profit.
It requires basic knowledge of the stock market, research, analytical skill, etc. Moreover, it involves a primary focus on making a profit in the short term by buying and selling shares. Hence short-term price fluctuations are important for stock traders and usually experience high risk and returns.
History of Trading
Trade has existed for as long as human civilization, i.e., the agricultural revolution. The form of trading, however, has varied across different societies. Primarily due to isolated human communities, which did not allow the unification into a single system. In the past, however, a form of trading that was prevalent across different societies was the barter system, where services and goods were traded in exchange for other services and goods.
However, the barter system was found inconvenient given the lack of any basic standard for measuring the value of products. This inconvenience forged the way for money, which acted as a standard against which the values of all products are measured. This invention triggered a chain of economic and financial developments such as the introduction of the credit facility, share trading, etc.
Stock trading came into existence with the formation of joint-stock companies in Europe and played an instrumental role in European imperialism. Informal stock markets started mushrooming in various European cities. The first joint-stock company to publically trade its shares was the Dutch East India Company which released its shares through the Amsterdam Stock Exchange.
After the success of joint-stock companies in fostering economic development along with geographical expansion, those were made a mainstay of the financial world. The first exchange for online trading in India and Asia was the Bombay Stock Exchange which was established in 1875. BSE, along with the National Stock Exchange in India, are the two main houses where stock market trading takes place.
Different types of stock
There are two main types of stock: common stock and preferred stock.
- Common stock. If you own just one share of stock in a company, you can attend its shareholder meetings and earn dividends. A company’s dividends may distribute profits to its shareholders in the form of cash or stock.
- Preferred stock. Preferred stockholders typically can’t vote on corporate matters that shareholders are asked to decide. But they get dividends before common stockholders. In addition, they’re in line ahead of common stockholders if the company files for bankruptcy and its assets are liquidated.
Beyond these two categories, there are types of stock that depend on the nature of the company:
- Growth stock are companies that are growing their sales and earnings at an above-average rate.
- Value stocks are companies that are undervalued compared to their real, underlying value.
- Dividend stocks are companies that reliably pay dividends to shareholders.
- Blue-chip stocks are big, well-established companies like Apple, IBM, McDonald’s, Microsoft and Walmart.
Stocks Are Traded on Stock Exchanges
In the U.S., stocks are traded on the New York stock exchange and the Nasdag, which are stock markets where shares of publicly traded companies are listed so they can be bought and sold.
Among the largest, best-known publicly traded companies in the U.S. are Walmart, Amazon and Apple. The NYSE lists more than 2,400 stocks, while Nasdaq lists more than 4,200 stocks.
“Public companies are a key part of the American economy,” states the U.S. Securities and Exchange Commission (SEC), an independent federal agency that regulates stock trading.
You might own a company’s stock through a retirement plan or mutual fund, for instance, or you might buy the stock directly through your own investment account.
How Does Stock Trading Work?
Investment firms, financial professionals and regular people all engage in stock trading. Their overarching goal is to buy stock at a low price and later sell it at a higher price.
When you want to buy and sell stocks, you can opt to use the services of a financial advisor or handle it on your own via an online brokerage or a trading app. No matter who places a stock order, trades on a stock exchange are handled electronically.
Among the types of stock orders that a trader can place are:
- Market order. This type of order aims to buy or sell shares at the price when the order is placed.
- Limit order. The trader specifies a price the stock needs to reach before buying or selling.
- Stop-loss order. Designed to prevent losses, this order sells a stock when it falls a certain price.
- Day-only order. This type of order is in effect solely on the day that it is placed.
- Good-til-canceled order. This type of order is in effect unless it’s carried out or canceled.
Day traders aggressively buy and sell stocks over the course of a single day, with the intent of reaping gains from short-term price changes. As you might imagine, day trading carries a lot of risk.
Meanwhile, buy-and-hold investors purchase stocks and hold them for an extended period of time, typically several years or more. The idea is to avoid the short-term fluctuations in the market and instead focus on the long-term growth potential of the investment.
How to manage stock trading risks
1. Lower risk by building positions slowly
Taking your time to buy helps reduce exposure to price swings. Moore says you can also look into high dividend stocks, which pay out portions of earnings to investors and ETFs which allows you spread your risk out among multiple companies.
2. Ignore hot tips
People posting online and paying for ads touting sure thing stocks are not your friends. In many cases they are part of a pump and dump racket. That's when shady people purchase buckets of shares in a little known thinly traded company and hype it up on internet
3. Keep good record of the IRS
If you are not using task advantaged account taxes on gain loses can get complicated. The IRS applies different rule and task rate that requires the filing of different forms for different types of traders. If you've sold stocks for profit, make sure to set aside some extra cash for a larger-than-normal tax bill. Another benefit of keeping good records is that loser investments can be used to offset other taxes through a neat strategy called task loss harvesting.
The process of stock trading for beginners
The following tips will help you begin your journey in stock trading
1. Open a demat account
To enter the share market as a trader or an investor, you must open a demat or a brokerage account. Without a demat account, you cannot trade in the stock market. A demat account works like a bank account where you hold money for trading. The securities you buy are maintained electronically in the demat account.
2. Understand stock quotes
Stock prices move as per demand and supply, economic reports, fundamental factors like company profitability and trader sentiment. By gaining knowledge about these aspects, you can enhance your understanding of stocks and stock markets. This will help you determine the right price to enter or exit a trade.
3. Bids and asks
A bid price is the maximum price you are willing to pay to buy a stock. The ask price is just the opposite. It represents the minimum price at which the seller is willing to sell the stock. To ensure a profitable trade, it is important to decide on the correct bid and ask price.
4. Fundamental and technical knowledge of stock
Study the fundamental and technical analysis of the stock to plan your trading. Fundamental analysis evaluates security by measuring its intrinsic value. It considers various dynamics, including earnings, expenses, assets and liabilities. Technical analysis evaluates the stock based on its past price and volume chart to predict future potential.
5. Learn to stop the loss
Volatility is an implicit characteristic of the share market. So, a beginner needs to understand how to prevent a heavy loss. While executing a trade, you must set a stop loss price to minimize the loss. Failure to put a stop to loss may heavily affect your capital.
6. Ask an expert
The share market is unpredictable. Nobody can predict a stock price accurately. However, taking advice from an expert helps beginners make the right trading decision. It guides you to make the right choice.
7. Start with safer stocks
A big capital loss in the beginning may bring your confidence down. A wise choice is to start with the less volatile stocks. This may give you a slow start, but these stocks are more likely to sustain a good performance even in adverse conditions.
Share market investments can be tricky. You can start by opening a demat account.. Next, work on developing adequate knowledge of the stock market. This will help you to work against the odds and beat stock market volatility.
Conclusion
In conclusion, investing in the stock market in India can be a lucrative opportunity for investors with a long-term outlook and a diversified portfolio. While there are risks associated with any investment, India's growing economy and stable economic environment make it an attractive destination for investors looking to expand their portfolio. By conducting thorough research and seeking advice from financial experts, investors can make informed decisions and take advantage of the potential benefits of investing in India's stock market.