Welcome to the world of trading, where every click, every decision, and every trade has the potential to reshape the financial landscape and rewrite the future of wealth. In this article, I will explain about the basics of trading and some important terminologies you need to know. I will also explain the different styles of trading.

What is trading?

Trading refers to buying or selling shares or other securities and holding them for a short period. Examples include buying a stock today and exiting it three days later. Or selling a stock and repurchasing it on the same day, etc.

In this, the holding period ranges from a few minutes to a few days. The objective is to profit from short-term price fluctuations. So, momentum plays a vital role in trading.

Trading is a high-risk – high-reward-type activity typically done by utilizing leverage, that is, trading on borrowed money. Because of its short-term nature, timing a trade, that is, entering and exiting at an appropriate time, is quite important. You might get the direction right, but you could still lose money if your timing is wrong.

Hence, trading is more suited to experienced individuals who understand the short-term price fluctuations of the market.

Important Terminologies You Need to Know When Placing Trades

Bid Price: This is the price that the buyer is willing to pay to buy a security. The trade will get executed if a seller is found at that price. 

Bid Quantity: This refers to the total quantity of shares being bid by all the buyers at a particular price.

Offer Price: This is the price that the seller is willing to accept to sell a security. The trade will get executed if a buyer is found at that price. The offer price is also known as the ask price. 

Offer Quantity: This refers to the total quantity of shares being offered by all the sellers at a particular price.

Bid-Ask Spread: This refers to the spread between the bid and ask price. It is a measure of market liquidity. A narrow spread indicates a liquid market, while a wider spread indicates an illiquid market. 

Open: This refers to the first price at which a trade occurred once the market opened for the day. 

High: This refers to the highest price at which a security was traded on a particular day. 

Low: This refers to the lowest price at which a security was traded on a particular day. 

Close: This refers to the last price at which a trade took place before the market closed for the day.

Previous Close: This refers to the closing price of the last session. 

Last Traded Price (LTP): This refers to the price at which a security is currently trading. 

Volume: This refers to the total number of shares traded at a particular price and time for a specific stock. Just like the bid-ask spread, volume is a measure of market liquidity. The higher the volume, the higher the liquidity, and vice versa.

Styles of Trading

Intraday Trading

Intraday trading refers to entering and exiting a trade on the same day. That is, buying a stock today and selling on the same day before the market closes, or selling short a stock today and repurchasing it on the same day before the market closes. 

Delivery-based Trading

This refers to buying shares today and holding them until the time they are credited to your Demat account. As shares traded on stock exchanges in India are settled on a T+1 basis, the holding period in delivery-based trading is typically two days or higher. So, in a sense, delivery-based trading could be based on the short-term or the long-term as well.

Margin Trading

Recollect that I mentioned the term, leverage when talking about trading earlier in this video. Margin trading is one such type of trading wherein you take positions partly through your capital and the rest by borrowing money from your stock broker. In return for the borrowed money, you must pledge collateral with the broker, such as shares or mutual funds from your Demat account. Because margin trading is done with borrowed capital, it tends to be riskier than delivery-based trading.

Short Selling

In the stock market, we typically purchase shares and then sell them later at a higher price. But did you know that you could also sell shares and repurchase them later at a lower price? This type of trading is called short selling, wherein you sell a share without having it in your Demat account. It is very important to remember that when you sell shares short, you must repurchase them on the same day, failing which the exchange would impose a penalty. Short selling is typically meant for experienced traders.

Pros

• High return
• 24/7 trading
• Low barrier to entry
• Access to a variety of markets
• Flexibility

Cons

• High risk
• Complex
• Emotionally demanding
• Time-consuming
• Regulation

Here are some additional things to consider before you start trading:

• Your investment objectives: What do you hope to gain from trading? Do you want to make a quick buck or do you want to develop long-term wealth?
• Your risk tolerance: How much danger are you willing to take? Trading can be a risky endeavour, so be honest with yourself about your risk tolerance.
• Your time horizon: For how long are you prepared to invest? Trading can be used as both a short-term and long-term investing strategy.
• Your trading style is as follows: There are numerous trading styles available, including day trading, swing trading, and position trading. Select a style that corresponds to your personality and risk tolerance.

Conclusion

Trading is an intricate process that necessitates a fundamental grasp of the market, the assets exchanged, and the hazards involved. Traders should always begin with a small investment and progressively expand it as they gain experience. They should also be prepared to lose money because trading is not a sure way to make money.

Join me on Groww to invest in Stocks and Direct Mutual Funds. Create your free demat account by using this link here:  https://app.groww.in/v3cO/nkg9du6k

Invest and trade with Kite by Zerodha, India’s largest retail stockbroker. Open an account now. https://zerodha.com/open-account?c=DYT311

Disclaimer: This blog post’s content is solely meant to be educational; it is not intended to be taken as financial advice. Please seek personalised advice from an experienced specialist based on your specific needs.