Are you familiar with the term trading?
Most of us have done trade in our everyday life, although we may not even know that we have done so.
To put in a simple way, everything you buy in a departmental store is trading money for the goods and services you want.
But do you know trading of securities in the Indian stock market?
This article will give you a complete understanding of what trading in the stock market means, how it can be done online and how much money you can make out of trading?
In this article
- Introduction to trading
- Methods of trading
- What is online trading?
- How to trade online?
- How much money can be made by trading?
- Art of trading
Introduction to trading
When we talk about trading in the stock markets, it is the same thing and uses the same principle.
Let me give an example from the share market.
Say someone is doing a trade in shares of a listed company. What he/she is actually doing is buying shares (or a small part) of the listed company.
So, if the value of those shares increases, then he/she will make money by selling them again at a higher price. This is trading in the share market.
You buy something for one price and sell it again for another (hopefully at a higher price), thus making a profit on trading and vice versa.
Trading in stocks can be financially rewarding if done in the right way. It involves riding the various ups and downs of the stock market.
Now, let’s look into the various ways to trade in the stock market.
Methods of trading
There are two basic methods of trading in the stock market.
1. Trading on the exchange floor
Trading on the exchange floor of the Bombay Stock Exchange (BSE) is the image most people have, thanks to television, especially old movies depictions of how the stock market works.
In the Indian stock market, this method of trading was used by all the stock exchanges till the introduction of an electronic method in 1992 by the National Stock Exchange (NSE).
Before 1992, in India, when the stock market opens in the morning, hundreds of people used to rush about, shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals which looks like chaos in a room full of traders.
At the end of the trading day, the exchange floor calms down, but it took up to 3 more trading days for a trade to settle, depending on the type of financial product.
Here is the step-by-step methodology of the execution of a simple exchange floor trade used to happen in Indian stock market before 1992.
Step #1: Trader tell his/her, broker, to buy 100 shares of Company X at the stock market.
Step #2: Broker’s order department sends the order to its floor clerk on the stock exchange.
Step #3: The floor clerk alerts one of the company’s floor traders, who finds another floor trader willing to sell 100 shares of Company X.
This is easier than it sounds because the exchange floor trader knows which floor traders make markets in particular stocks.
Step #4: Finally, the two agree on a price and complete the trade deal and broker calls the trader back with the final price.
This process used to take a few minutes or longer depending on the stock and the market situation. After few days, traders receive the confirmation notice in the mail.
Note: Above is this example was a simple exchange floor trades, complex stock trades and large blocks of stocks involve considerably more details in the trading process.
2. Trading Electronically
NSE is the youngest stock exchange of India which came into the picture in the year 1992.
It made a great impact on the Indian stock market by becoming the first exchange in India to provide the latest, modern, fully automated, screen-based electronic trading system.
NSE offered an easy trading facility to the investors spread across the length and breadth of the country.
In the year 1995, there was a strong push to move more trading to the networks and off the trading floors. But this push was been met with some resistance from the regional and smaller stock exchanges in India.
The most notable and popular stock exchange of Indian market i.e., BSE adapts electronic trade with the commissioning of Online Trading System (BOLT).
The electronic trading markets use large computer networks to match buyers and sellers, rather than human brokers.
While this system lacks the romantic and exciting images of the BSE floor, it is efficient, reliable and faster.
For an individual trader or investor, you frequently can get almost instant confirmations on your trades, if that is important to you.
However, it is important to know that, you still need a stockbroker to handle your trade-in stock. Individuals don’t have access to the electronic markets.
The stockbroker accesses the exchange network for you, and the system finds a buyer or seller depending on your order.
But now the question arises – how trading happens in Indian stock market and why does the price of stocks fluctuate?
What is online trading?
Online trading involves the trading of stocks through an online platform that facilitates the trading of various financial products such as shares, mutual funds, commodities, etc.
In the 21st century, trading on stocks has become as simple as shopping of products online. Anyone can do trade by sitting in a coffee shop using their smartphone.
All it needs is good internet, subscription to 3-in-1 account, a mobile banking app and sufficient money in the bank account.
Thankfully, all the hectic paperwork has come down to a single touch on the mobile screen.
There are many free and paid mobile and web apps and portals are available on the internet for trading.
How to trade online?
Follow these 4 steps for online trading in stocks:
Open a Demat and a Trading Account
The very first thing for online trade, you need to do is to a trading and a demat account with an online stockbroking firm registered with SEBI.
Learn basics about the stock market
The stock market functions on the basis of supply and demand. So, before getting engaged in any trade, you must learn about all the basics of the stock market.
Keeping a track on financial news, listening to podcasts and taking up a course on investing are all excellent ways to become an efficient trader.
Practice with an online simulator on the stock market
Online stock trading simulators are a great way to learn online trading in a safe and efficient manner.
Since it is a simulator, the losses you make would have no impact on you, hence you can learn the trade without any fear.
Make an investment plan
To set a financial goal based on your risk appetite is very important to think through your investment strategies.
Then make an advance decision on how much you are willing to invest in a particular company and set limits on the amount of loss you are willing to bear.
If you adapt to all above mention points, online trading on stocks will be an easy and profitable task for you.
The practice is the key to successful online trading.
How much money can be made by trading?
There is no limit to the amount of money you can make by trading stocks.
We are talking about the Indian stock market. It is one of the highest liquidity markets where people can earn any amount of money, but remember that people can lose too.
It all depends on who is trading. If you have no stock trading experience, it is highly likely that you will lose money – if you are not careful.
But if you are a skilled trader, it is even possible to make ₹1 lakh per day with ₹1 crore of investment, i.e. 1%.
Art of trading
Trading in the stock market can be very complicated and unpredictable in nature.
People talk about making and losing money in the share market all the time.
Trading in the stock market requires a fundamental knowledge of all the factors that can influence the demand and supply of financial product in the market.
Given below are some trading tips that can help you cut your losses by investing in stocks in a more efficient way.
Stop loss process
Stop loss is a trading process that allows you to cut on your losses while trading in the stock market.
When you put a stop loss criterion at a certain price of your stock, it is automatically sold when the price falls below the stop loss price level.
If you have bought shares of a company X at ₹300 and you have put a stop loss order at ₹260. So, if the price falls to ₹260, your shares will be sold automatically, thereby reducing your loss to just ₹40.
Thorough background research
You must thoroughly do research of the company you choose to trade in, to make a successful investment decision.
Background research involves checking the company’s past balance sheets and income statements, short-term and long-term earnings of the company, and its past performance in terms of profit.
It will help you to determine the future growth potential of the company and whether you will be able to get a regular dividend from shares of this company you have chosen.
Regularly monitor your investments
One of the most important tips require to be successful in the stock market is to monitor your investments or portfolio on a regular basis.
Monitoring your portfolio on a regular basis helps you to sell your stocks immediately if you think they are going to fall below a particular price in the future.
Apart from this, you can also earn a huge amount of profits by selling your stocks at the time when they are at their peak price.
Patience is key to any investment, be it a risk or non-risky investments.
Investors of stock market lose out on great opportunities when they sell their stocks too early.
If the price goes slightly higher, they sell the stocks and book whatever profits they get even when they could have made so much more had they waited a little longer.
So, you should be patient enough and wait for the perfect time before making an investment decision. You should sell your stocks only after analyzing the market trend.
If you are sure that the market will not rise higher any further, then only you should go ahead with your decision to sell your stocks.
Avoid herd mentality
One of the most gruesome mistakes one can commit in the stock market is to trade just because everyone else is trading.
As an investor/trader, you have to understand that your financial goals are in no way similar to any other person.
What others might think is a perfect investment for them can turn out to be the worst investment for you, in accordance with your financial goals and risk appetite.
So, you should make your own decisions after carefully analyzing your financial condition and determining what you stand to gain and lose by trading in particular stock.
If you are passionate enough about trading in the stock market, you should consider following these trading tips as it will help you to build wealth without losing much money.
Difference between trading and investment
People get confused between “Trading” and “Investing” and often use as same, but these are two different terms.
Trading involves frequent buying and selling of stocks with the aim to gain more and faster returns on money invested.
While in investing, people invest their wealth and held the stocks for a few years to even decades, in order to take advantage of benefits like dividends, long term returns, interests, etc.
Staying profitable and avoiding loss is important for any trader, whether new or experienced in the stock market.
You should be aiming for loss prevention and profits will come automatically.
Any profit is a good profit in the stock market.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.