Personal Finance

What is trading?6 min read

February 14, 2021 4 min read

What is trading?6 min read

Reading Time: 4 minutes

Trading began way back in prehistoric times and may have been in existence through most of recorded human history. It simply means exchanging one thing for another. The direct exchange of goods, services, or both was barter, a type of trade seen previously. People took advantage of specialization and division of labor. It was, however, inconvenient as there was no basic measure to calculate the value of products. This led to the invention of money, which became the standard for measuring the value of products.

The ease offered by money led to the proliferation of economic and financial developments such as the introduction of stock trading. Stock trading occurs in the marketplace where investors can buy or sell shares of publicly traded companies, who are listed on the stock market to raise capital. The price of each share is governed by demand and supply, i.e., the more shares of a company are bought, the higher the price goes. On the other hand, in case of less demand, the price of the shares drops.

The first modern stock market began in Amsterdam in the 17th century. The Dutch East India Company was the first publicly-traded company. To raise funds, the company decided to sell their stock and also pay dividends of the shares to their investors. Funnily, for many years, the only trading activity on the Amsterdam stock exchange was trading the shares of the Dutch East India Company.

Meanwhile, the Bombay Stock Exchange (BSE) is Asia’s first stock exchange. In the 1850s, stockbrokers would conduct business under a banyan tree near Mumbai town hall. After decades of trying out various locations, they zeroed in on Dalal Street, which became the location for the Native Share and Stock Brokers’ Association in 1875.

What are the types of trading?

There are five main types of trading methods.

1. Scalping: Also called micro-trading, scalping involves making small profits repeatedly. The trade lasts anywhere from seconds to minutes. Thus, investors who are confident about their proficiency in the markets and have enough experience can implement this strategy as it requires expert skill. Using this method, investors place ten to a few 100 trades in a single day. They try to make a profit through small moves in stock prices.

2. Day Trading: Day trading means buying and selling a stock on the same day and does not involve holding positions overnight. Simply put, a day trading investor closes all of their positions before the market closes. So here, investors might hold positions for minutes to hours. Of course, investors may need strong discipline, a full-proof strategy, and enough capital to withstand large and sudden losses.

3. Momentum Trading: This involves a “breakout” stock, i.e., a stock price that is moving outside stipulated support or resistance level, and that too, with increased volume. So, once an investor identifies such a stock, they may ride on the upward or downward momentum offered by the stock. In this type of trading, investors will hold their position from several hours to several days depending on how fast the stock moves and when it changes direction.

4. Swing trading: It is similar to capturing a short term trend. So, it aims to catch the advances in a stock within one to seven days. To look for such stocks that show short-term price momentum, swing traders use technical analysis. Of course, they aren’t interested in the stock’s fundamentals and its intrinsic value but in its price patterns and trends. Investors hold their position from three to seven days depending on the stock’s movement.

5. Position trading: This involves taking a long-term approach to a particular stock. So, investors who opt for this anticipate whether the current trend will continue for a much longer period than momentum or swing trading. Due to their long-term position, investors make considerable gains. Moreover, they are not worried about short-term fluctuations as they believe that their long term investment horizon will smoothen things.

How does stock trading work?

After a stock is listed on the stock market through an initial public offer (IPO), then the stocks can be traded in the secondary market. A broker is a middleman, i.e., the link between the stock market and the investor. If you intend to buy a share, approach your broker. The broker, say Paytm Money, will pass on the buy order to the stock market. Your buy order is matched with a sell order of the same share by a trading computer. Once the buyer and seller are in step, the transaction is finalized. The stock market informs Paytm Money that your buy order is confirmed and that they have a seller at the stipulated price. Paytm Money informs you about the same.

Subsequently, the stock exchange confirms the details of the buyer and seller so that none of the two parties default. It then begins the process of transferring the shares to the buyer, also termed the settlement cycle. Previously, the settlement cycle lasted a week, i.e., from Monday to Friday for the BSE and from Tuesday to the following Wednesday for the NSE. However, now they have reduced this cycle to T+2 days (i.e., two working days). After the transaction is done, Paytm Money provides a contract note to the investor which has all the details of the transaction, including the time and date of the stock trade. Apart from the stock price, the investor has to pay the brokerage fees, stamp duty, and the securities transaction tax. You can use Paytm Money’s Brokerage Calculator to gauge the additional charges you would have to pay. The broker identifies each investor using a unique code assigned to the latter.

Online trading: Paytm Money is the future of investing!

There is no doubt that stock market trading has received a fillip ever since online trading has come into play. Now, all that you require to trade is a Demat account, stable internet connection, a 3-in-1 online trading account, and sufficient funds in your bank. You can now buy and sell securities and undertake share trading from just about anywhere. With the convenient mode of online trading for investment with Paytm Money, now any individual trading in India can participate in long-term wealth creation with a single click!

Conclusion

Stock market trading does not always guarantee high returns. There is quite a bit of risk involved too. But if undertaken in a systematic manner after learning the basic and intricate working of the stock market and applying the technique that suits your investment goal, it can be a great mode of creating wealth in the long term.