Trading in the share market refers to buying and selling financial instruments, such as shares, bonds, commodities, currency, and other derivatives, to profit from them. When people ask, What is trading in share market? the definition is straightforward, as it relates to buying companies’ shares to realize profits through an increase in those shares’ values.
The share market offers a place to exchange financial assets among individuals, institutions, and businesses. This trading form is done through exchanges like the National Stock Exchange and Bombay Stock Exchange, among others in India. Since then, the art of Trading has seen massive changes over the years, mainly due to online sites where a person with an internet connection can trade.
This comprehensive article will discuss the history of Trading, types of Trading in the stock market, how Trading works, the current impact of online Trading, various assets that can be traded, and the differences between Trading and investing. We’ll also answer some frequently asked questions to clear up common doubts.
History of Trading
Trading has existed for thousands of years, beginning from the early bartering of goods and services in ancient times. Trading gradually developed into more complex financial systems that form the foundation of the current global economy.
Early Beginnings
In ancient civilizations such as Mesopotamia, Egypt, and the Indus Valley, people traded goods like grains, spices, textiles, and livestock through barter systems. There was no concept of money; people exchanged one item for another based on mutual agreement. This method worked well in small communities but became inefficient as societies grew.
Birth of Financial Markets
The first official financial markets emerged in Europe in the 16th and 17th centuries. In 1602, the first official stock exchange in the world was started in Amsterdam. Investors could acquire company shares like the Dutch East India Company, funding overseas exploration and trade. This was the concept of owning a small portion of a firm in exchange for potential gains.
Trading in India
It started in the 19th century in India with the Bombay Stock Exchange (BSE) in 1875. It began as a gathering of brokers who traded under a banyan tree in Mumbai. Later on, in 1992, the National Stock Exchange (NSE) was developed, which implemented electronic Trading, thus eliminating physical trading floors. This made it faster and much more efficient.
Today, most Trading is performed on apps and digital platforms. Traders can purchase and trade shares, commodities, and currencies with just a few clicks. This shift has made trading more accessible to people worldwide, including retail investors who could not previously have access to financial markets.
What is Trading in the Stock Market?
Trading in the stock market involves buying and selling publicly listed company shares to benefit from the fluctuation in price. Unlike other forms of investing, which take a long time to mature, Trading is mainly short-term because it aims to make quick gains.
How it Works?
By buying a stock, you purchase a small portion of that company called a share. The value of your shares varies with the company’s performance and general market conditions. If the price at which you buy a stock becomes higher after it has been purchased, you can sell it at a higher price and get more than what you paid. Conversely, if the price falls, you incur a loss.
Trading is the execution of two basic actions:
- Buying (Going Long): You purchase shares when you feel the price will increase.
- Selling (Going Short): You sell shares when you feel the price will drop and then purchase them back when they are cheaper.
Key Stock Market Players
- Retail Traders: These are the individual investors trading with their money. They generally trade in low volumes and base their trades on personal research.
- Institutional Traders: This includes large institutions such as mutual funds, banks, and hedge funds that trade in huge volumes. Their trades can significantly influence market prices.
- Market Makers: These are firms or individuals that provide liquidity to the market by continuously buying and selling stocks. They ensure there is always someone to match a trade.
- Stockbrokers: act as intermediaries between the trading parties and the stock exchange.
- Stock Exchanges: These are places where trade is performed, such as NSE and BSE.
- Regulatory Bodies: SEBI, or the Securities and Exchange Board of India, regulates trading activity with a promise of fairness and transparency.
Stock Exchanges in India
- Bombay Stock Exchange (BSE): The oldest stock exchange in Asia; it began in 1875. It has over 5,000 listings and is one of the biggest in the world.
- National Stock Exchange (NSE): Established in 1992, it started electronic Trading on Indian bourses. NSE is known for its advanced technology and higher trading volumes, especially in derivatives.
Types of Trading in the Stock Market
There are various types of Trading based on the trader’s time frame, strategy, and risk tolerance. All of them have different skills and approaches.
1. Day Trading
When someone asks, What is day trading in the share market? the response is that it is a trade where one buys and sells shares within the same day. Traders close all positions before the market closes to avoid overnight risks.
Key Features of Day Trading: Day traders will be concerned with rapid trades, taking advantage of slight movements in the price throughout the day. Many trades are conducted within a session. This trading style demands much attention because price movements can shift quickly. A day trader utilizes technical analysis techniques, such as charts, indicators, and patterns in price movement, to base their decisions.
Who Should Consider Day Trading?
Day trading is appropriate for individuals who can dedicate several hours to keeping track of their markets. Rapid decision-making skills are needed, and the readiness to handle high-pressure situations is required.
2. Swing Trading
The practice is called swing trading, that is to say, holding stocks for several days or even weeks to capture short- to medium-term price trends. It means while a day trader does not bother with daily price movements, he looks into trends on a bigger platform.
Key features:Swing trading uses technical factors and fundamental analysis to predict the change in markets. They use tools like trend lines and moving averages, like volume indicators. Because swing trading does not need constant monitoring, it is popular with part-time traders.
Who Should Consider Swing Trading?
This strategy suits people who can’t watch the market all day but are comfortable with moderate risk. It gives more time for research and analysis, making it less stressful than day trading.
3. Position Trading
Position trading is a long-term strategy where traders hold assets for months or even years. This approach focuses on the company’s fundamentals rather than short-term price changes.
Key Features of Position Trading: Position traders examine financial statements, economic indicators, and industry trends. The purpose is to generate profit based on the company’s long-term growth. There are fewer transactions, thus lower transaction costs than other trading forms.
Who Should Consider Position Trading?
Position trading is suitable for long-term-focused individuals who want to make well-thought-out decisions and hold investments through market ups and downs.
4. Scalping
The fastest trading style is scalping. Scalpers execute dozens or hundreds of trades daily, seeking to profit from minuscule price changes.
Key Features of Scalping: Scalping requires quick reflexes, sophisticated trading tools, and intense focus. Scalpers hold positions for just a few seconds or minutes on average. They operate with very high trade volumes to reap substantial profits from tiny price differences.
Who Should Consider Scalping?
This strategy is ideal for professional traders who can make quick decisions at the spur of the moment. Scalping is not advised for beginners as it involves much risk and speed.
How Do Stocks Work?
Stock trading happens among related networks of buyers and sellers over a platform of stock exchanges. Trading occurs in this network of buyer-seller contacts wherein the transaction order of the exchange is fulfilled. Trading Process is as follows:-
Step 1: Opening Trading Account
To begin Trading, one can open a Demat or trading account through a registered broker. A Demat account holds shares, but you can buy and sell them through the trading account through the trading account.
Step 2: Order Placement
An order to buy or sell one can be placed. The following types of orders are:
Step 3: Market Order
It is immediately executed at the prevailing market price.
Step 4: Limited Order
Fill only in the specified price set.
Step 5: Stop-Loss Order
It automatically sells when the stock reaches a fixed price so that the loss is minimal.
Step 6: Order matching
The order is matched to another party at the exchange, ready to take on the opposite end of the transaction.
Step 7: Trade Execution
Once orders are matched up, the trade execution occurs as shares are delivered.
Settlement: Settled in T+1 cycle in India. This means the trade will be settled on the day of the transaction date.
Present Consequences of Online Trading
Online Trading is one of the revolutionary movements in financial markets. Mobile applications and online forums allow one to participate in the stock market inside one’s house.
Benefits of Online Trading
Online trading is associated with numerous benefits as well:
- Convenience: You can easily trade anywhere or anytime using mobile or computer gadgets.
- Cost-efficient: The costs of a brokerage house’s commissions are relatively inexpensive compared to those of a conventional broker.
- Current Data: Trading is granted real-time information on market activities, charts, and news, which aids them in making wise decisions.
Drawbacks of Online Trading
Online Trading has its benefits, but risks are involved also:
- Market Volatility: Quick price movement can lead to heavy losses.
- Overtrading: The ease of Trading may cause the person to overtrade without proper research.
- Cyber Risks: He must protect his accounts from hacking and other online scams.
Online Trading in India
While it is apparent that most of the rising retail investors can be credited to the fact that trading platforms like Zerodha, Upstox, and Groww have gained widespread popularity, the COVID-19 pandemic certainly nudged people to work from home and find ways to earn some extra money.
What Assets and Markets Can You Trade?
Trading is not strictly about stocks. A wide range of financial instruments are available to buy and sell in various markets.
1. Stocks: Stocks are a share in a company. When you purchase a stock, you have a share in the given company. The value of the stock increases or decreases depending on how well the company is performing and prevailing conditions in the market.
2. Derivatives: Derivatives are contracts whose value depends on an underlying asset, for example, stocks, commodities, or currencies. The most common derivatives are futures and options. What is derivative Trading in the share market? It is a process of trading contracts on the future price of an asset rather than the asset itself.
3. Commodities: Commodities include physical goods such as gold, silver, crude oil, and agricultural products. Commodity trading in the share market refers to the buying and selling contracts for these commodities on commodity exchanges like MCX.
4. Currencies: Currency trading, also known as forex trading, is the buying and selling of foreign currencies. What is currency trading in the share market? It speculates the value of one currency over another to earn profits.
5. Bonds and Mutual Funds: A bond is a form of debt security wherein you lend some money to an entity in return for receiving interest payments. A mutual fund pools money from many investors to invest in a diversified portfolio of stocks, bonds, and other securities.
Trading in Share Market FAQs
What is option trading in the share market?
Options trading in the share market include buying and selling contracts that allow you to obtain the right to buy or sell an asset without an obligation. This must be done within a given set period at an agreed price.
What is future trade in the share market?
Future trade in the share market refers to contracts where two parties agree to buy or sell an asset at a predetermined price on a future date. This helps traders speculate on price movements.
What is derivative Trading in the share market?
Derivative Trading in the share market involves trading financial contracts that derive value from an underlying asset, like stocks, commodities, or currencies.
What is currency trading in the share market?
Currency trading in the share market is buying and selling different currencies to profit from the fluctuations in the exchange rates.
What is commodity trading in the share market?
Commodity trading in the share market is the buying and selling contracts based on physical goods like gold, silver, crude oil, and agricultural products.
