Types of Share Trading
There are five main types of share trading, each defined by the duration for which securities are held and the strategy employed.
1. Day Trading
Day trading involves buying and selling stocks within the same trading session, which typically runs from 9:15 AM to 3:30 PM on weekdays, excluding market holidays. Positions are held for minutes to hours and must be closed before the market closes for the day.
This type of trading is generally associated with taking advantage of small price fluctuations in stock values. It typically requires a solid understanding of market behaviour, volatility, and price movements, and is more commonly practised by those with prior trading experience.
2. Scalping
Scalping, also referred to as micro-trading, is a subset of intraday trading, as is day trading. It involves executing a large number of trades — ranging from a dozen to over a hundred — within a single trading day, with each trade aiming for a small profit.
Positions in scalping are held for very short durations, often just a few minutes, which allows for a higher frequency of transactions. It is worth noting that not every trade results in a profit, and cumulative losses can sometimes exceed gains. Like day trading, scalping generally requires market knowledge, awareness of price fluctuations, and the ability to execute transactions quickly.
3. Swing Trading
Swing trading is a style that aims to capture gains from short-term price trends and patterns. Positions are typically held for a period ranging from one to seven days. Traders using this approach generally rely on technical analysis to assess price movement patterns and align trades with their investment objectives.
4. Momentum Trading
Momentum trading is based on identifying stocks experiencing significant price movement, either upward or downward. Traders look for stocks that are breaking out or showing signs of a breakout.
When a stock is moving upward, a trader may choose to sell existing holdings to realise gains above the average purchase price. When a stock is trending downward, a trader may purchase shares with the expectation of selling them at a higher price later.
Example: Mr A holds 7,000 shares of S Private Limited at ₹50 per share. On 1st April 2019, he observes an upward trend in the share price and decides to sell 3,000 shares at ₹60 per share on the first day, followed by the remaining 4,000 shares at ₹65 per share.
His overall profit from these transactions is calculated as follows:
(3,000 × ₹60) + (4,000 × ₹65) − (7,000 × ₹50) = ₹1,80,000 − ₹90,000 = ₹90,000
5. Position Trading
Position trading involves holding securities over an extended period, typically several months. The focus is on the long-term potential of a stock rather than short-term price fluctuations. This approach is generally more suited to individuals who do not actively monitor the markets on a daily basis.
How does trading work?
Stock trading in India is the buying and selling of shares of a listed entity in one of the leading stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
The capital market in India consists of two major segments: primary market and secondary market. On the primary market, private companies (who became public )can issue securities directly to the public to raise funds through a public offering. These are of two types: Initial Public Offering (IPO) and Follow-on Public Offering (FPO).
Once the IPO is completed, all shares of a company are listed in the secondary market, where investors can freely buy and sell stocks and other securities. In India, people are required to open a Demat and trading account with a stockbroker to hold and trade shares.
Whenever there is a purchase request with the broker, it gets passed on to the respective stock exchange. Here, the exchange matches a buy order with an equivalent quantity of a sell order of the same stock. Following this, a transaction takes place where cash and securities are exchanged.
Current impact of online trading
The advent of digital trading has significantly reshaped the financial sector, providing individual investors with unparalleled access to global markets. It has empowered retail traders by offering cost-effective solutions, instant market updates, and greater flexibility in trade execution.
Furthermore, this mode of investing has facilitated the rise of automated investment tools such as robo-advisors, broadened the range of available financial instruments, and spurred technological advancements within the industry. However, this digital evolution also brings challenges, including regulatory complexities, increased market volatility in certain assets, and cybersecurity threats. As a result, traders must approach electronic platforms with caution and adaptability to navigate potential risks effectively.
With continuous technological progress, web-based trading is set to play an even more significant role in shaping the future of the financial landscape.
What assets and markets can you trade?
You can trade a wide variety of financial assets and markets which include:
- Shares: Trading in individual company stocks, allowing you to buy and sell ownership stakes in specific businesses.
- Indices: These are indicators that represent a basket of stocks or assets, allowing you to predict the overall performance of a group of companies or markets.
- Forex: The foreign exchange market, where you can trade currency pairs, taking a chance on the relative strength or weakness of one currency against another.
- ETFs (Exchange-traded funds): These are investment funds that hold a collection of assets like stocks, bonds, or commodities. Trading ETFs allows you to gain exposure to a diversified portfolio.
- Bonds: You can trade bonds, which are debt securities issued by governments, municipalities, or corporations, providing fixed income in the form of periodic interest payments.
- Commodities: Trading in raw materials and primary agricultural products, including precious metals, energy resources, and agricultural goods.
- IPOs (Initial public offerings): Participating in the initial issuance of shares by a company when it goes public, potentially gaining from the stock's early price movements.
While there are various instruments to trade, it's essential to recognise that options trading carries inherent risks. The primary goal is to make a profit on the basis of market movements. However, it's crucial to exercise risk management to avoid unexpected losses, as trading can be volatile and unpredictable.
Difference between trading and investing
Trading and investing represent two distinct approaches with different objectives, time frames, strategies, and risk attitudes.and Investing
| Aspect | Investing | Trading |
| Purpose | Builds wealth over the long term | Generates profits from short-term market movements |
| Time frame | Long-term (years to decades) | Short-term (minutes to weeks) |
| Focus | Capital growth and income | Capital gains from price fluctuations |
| Risk | Lower, due to longer time horizons | Higher, often increased by leverage |
| Analysis type | Fundamental analysis | Technical analysis |
| Emotional stress | Less frequent monitoring needed | Requires constant vigilance and quick decisions |
Who trades and who invests?
Traders and investors play distinct roles in financial markets, each with unique objectives and strategies.
Traders engage in short-term buying and selling of financial instruments, aiming to profit from short-term price fluctuations. They typically rely on technical analysis, market trends, and volatility to make rapid decisions. Traders often have a high-frequency trading approach, seeking to capitalise on market inefficiencies and momentum. Their primary goal is to generate profits quickly, often within minutes, hours, or days.
On the other hand, investors take a long-term perspective, seeking to build wealth over time through the appreciation of assets. They focus on fundamental analysis, examining the financial health and growth prospects of companies or assets. Investors aim to create wealth through capital appreciation, dividends, or interest income. They are generally less concerned with short-term market fluctuations and instead focus on the long-term growth potential of their investments.
In summary, traders seek short-term gains by actively buying and selling securities, while investors take a long-term approach, aiming to build wealth over time through strategic investment decisions.
Open a trading account and trade stocks with ease!
What are the advantages of trading?
Trading stocks and other securities offer several benefits that make it an attractive option for investors:
- Profit potential: Trading provides the opportunity to achieve significant profits within a relatively short time frame. When executed with the right strategy at the right time, traders can capitalise on market movements to generate substantial returns on their investments.
- Flexible in nature: Trading is inherently flexible. Traders have the freedom to buy and sell securities as and when it seems appropriate. This flexibility allows investors to adapt to changing market conditions and capitalise on opportunities.
- Access to a growing economy: Active participation in trading, especially in sizeable trades, provides traders with direct exposure to the economic growth of the country. When a market index increases in value, it signifies the economic expansion of the nation. Therefore, professional traders can benefit from the growing economy by strategically investing in assets influenced by this growth.
- Take advantage of economic growth: Trading allows investors to leverage economic growth. A growing economy often translates to increased corporate earnings due to job creation, higher income levels, and increased consumer spending. Investors can capitalise on this by investing in businesses poised for growth in response to economic expansion.
- Easy buying and selling: The process of buying and selling shares in the stock market is straightforward and accessible to all investors. It begins with opening a Demat account, which can be done through a broker, financial planner, or online mode. Setting up an account is a quick process, taking about 15 minutes, and allows investors to initiate their investment journey. Once the account is established, investors can conveniently place buy and sell orders to engage in trading activities.
- Flexibility for small investments: Even new investors can start with a relatively small amount by purchasing stocks of small-cap or mid-cap companies in smaller units. This accessibility is ideal for those who want to test the waters of trading with limited capital.
- Liquidity: Stocks are considered highly liquid assets. They can be readily converted into cash at any time, offering a level of liquidity that is often superior to other financial assets. Investors can easily sell their stocks when needed, making it a convenient choice for those who require quick access to their investment funds.
Online trading vs offline trading
Here is a comparison between online trading and offline trading in India:
- Convenience: In the online mode, one can trade from almost every part of the world. While in an offline mode, a trader will have to visit a broker's office in person or call your broker for trading.
- Ease of trading: In online trading, one can make decisions freely without any intervention from any external source. However, with offline trading, all transactional activities are carried out by the broker.
- Quality advice: Online trading provides access to detailed reports with charts, patterns and trend recommendations.
Conclusion
The practice of trading in India is growing at an exponential pace as evidenced by the growth of Demat and trading accounts with various stockbrokers. Hopefully, this article has served the purpose well for those who are looking forward to starting trading on the stock market.
Related articles
