Trading

What is Trading? – Types and History of Trading

Trading is essentially the exchange of goods and services between two entities. It is the basic principle which forms the core of all economic societies and financial activities.

Trade governs the wheels of progress in any society and allows for wealth creation. A place where any form of trade takes shape is called a market. Depending on the kind of products, the market is defined. For instance, a place where stock trading takes place is called the stock market.

There are primarily two forms of the market – organised and unorganised. Organised market is constituted with a set of rules and regulations which every entity operating in the market needs to adhere to and usually consists of a regulatory body to supervise such adherence. An unorganised market does not contain any strict rules and regulations, and even if it does, adherence is not mandatory.

With online trading and investing, the process has become much more convenient, where most markets have been simulated on the internet.

History of Trading?

Trade has existed for as long as the human civilisation, 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 which 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 of measure of 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 who 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.

Types of Trading?

Primarily, there are five types of share trading. These are –

Day Trading: 

This form of trade involves purchasing and selling stocks in a single day. In the case of day trading, individuals hold stocks for a few minutes or hours. A trader involved in such trade needs to close his/her transactions prior to the day’s market closure. It is popular for capitalising on small-scale fluctuations in NAV of stocks.

Day trading requires proficiency in market matters, a thorough understanding of market volatility, and keen sense regarding the up and down in stock values. Therefore, it is performed mostly by experienced investors or traders.

Scalping:

It is also known as micro-trading. Scalping and day-trading are both subsets of intraday trading. Scalping involves reaping small profits repeatedly ranging from a dozen to a hundred profits in a single market day.

However, every transaction does not yield profits, and in some cases a trader’s gross losses might exceed the gains. The holding period of securities, in this case, is shorter compared to day-trading, i.e. individuals hold stocks spanning a maximum of a few minutes.

This feature allows for the frequency of transactions. Similar to day-trading, scalping requires market experience, proficiency, awareness of market fluctuations, and prompt transactions.

Swing Trading: 

This style of stock market trading is used to capitalise on the short-term stock trends and patterns. Swing trading is used to earn gains from stock within a few days of purchasing it; ideally one to seven days. Traders technically analyse the stocks to gauge the movement patterns they are following for proper execution of their investment objectives.

Momentum Trading:

In case of momentum trading, a trader exploits a stock’s momentum, i.e. a substantial value movement of stock, either upwards or downwards. A trader tries to capitalise on such momentum by identifying the stocks that are either breaking out or will break out.

In case of upward momentum, the trader sells the stocks he/she is holding, thus yielding higher than average returns. In case of downward movement, the trader purchases a considerable volume of stocks to sell when its price increases.

Example:

Mr A holds 7000 shares of S Private Limited at Rs. 50 per share. On 1st April 2019, he sees the NAV of such shares showing upward momentum. He decides to sell 3000 shares at Rs. 60 on the first day. After that, He sells the remaining shares at a uniform rate of Rs. 65.

Therefore, his overall profit from the transactions is –

Rs. {(3000 * 60) + (4000 * 65)} – (7000 * 50) or, Rs. 90,000

  1. Position Trading: Position traders hold securities for months aiming to capitalise on the long-term potential of stocks rather than short-term price movements. This style of trade is ideal for individuals who are not market professionals or regular participants of the market.

Impact of Online Trading?

The internet has significantly contributed to elevating stock market trading. It has made securities more accessible and convenient to the layman. An individual can now easily trade in the stock market through online trading in India.

Mutual Funds have also gained significant popularity since the advent of online trading. Individuals can now directly access MFs and other securities from a vast reservoir of options available online. Investors can now trade more actively and speculatively, thus, increasing their chances of profitability.