Understanding What is Equity Trading and Its Types

Equity trading is a type of financial transaction where investors buy and sell shares of publicly traded companies.

The primary goal of equity trading is to make a profit by buying shares at a low price and selling them at a higher price.

Equity trading allows individuals to own a portion of a company, making them part-owners.

There are two main types of equity trading: long and short.

An equity trader is someone who participates in the buying and selling of company shares on the equity market.

Equity trading involves exchanging goods and services between two entities, which in this context are investors/traders exchanging stocks of different companies.

In essence, equity trading takes place in the stock market, making it accessible to a larger section of people through online trading and investing.

There are several types of stock trading, and understanding them can help you navigate the equity market with confidence.

Active trading is typically characterized by an investor placing 10 or more trades per month, often relying on timing the market to turn a short-term profit.

Day trading, on the other hand, involves buying and selling the same stock in a single trading day, with traders focusing on daily price swings rather than the inner workings of the businesses.

Here are the five types of share trading, as identified:

Day traders care little about the inner workings of the businesses, focusing instead on making a few bucks in the next few minutes, hours or days based on daily price swings.

Trading is essentially the exchange of goods and services between two entities. In this context, the entities are investors/traders who are exchanging stocks of different companies.

Stock trading takes place in the stock market. With online trading and investing, stock markets have become accessible to a larger section of people.

An equity trader is someone who participates in the buying and selling of company shares on the equity market.

Trade has existed for as long as human civilization, dating back to the agricultural revolution. The barter system, where services and goods were traded in exchange for other services and goods, was a common form of trading across different societies.

However, the barter system was found inconvenient due to the lack of any basic standard for measuring the value of products. This led to the invention of money, which acted as a standard against which the values of all products are measured.

The first joint-stock company to publicly trade its shares was the Dutch East India Company, which released its shares through the Amsterdam Stock Exchange. This marked the beginning of stock trading as we know it today.

The success of joint-stock companies in fostering economic development and geographical expansion led to their widespread adoption. The first exchange for online trading in India and Asia was the Bombay Stock Exchange, established in 1875.

Fundamental analysis is a crucial step in equity trading, helping you determine if a company is a worthwhile investment.

Before making an investment decision, you need to evaluate the financial position of the company.

An equity trader looks at financial metrics such as profit margin, quick ratio, and receivables.

Analyzing financial statements like a balance sheet, income statement, and cash flow statement can give you valuable insights.

Anything that can give an equity trader insight into whether or not a company is performing well is looked into and analyzed thoroughly.

The current impact of online trading has been significant, making securities more accessible and convenient to the layman. An individual can now easily trade in the stock market through online trading in India.

Online trading has also made mutual funds more popular, allowing individuals to directly access a vast reservoir of options available online. Investors can now trade more actively and speculatively, increasing their chances of profitability.

The internet has elevated stock market trading, making it easier for people to trade from the comfort of their own homes. This convenience has opened up new opportunities for investors to grow their wealth.

Some of the key benefits of online trading include:

The ability to trade online has also led to increased activity in the stock market, with more individuals participating in the market than ever before. This has created new opportunities for investors to buy and sell securities.

Trading Strategies can be quite simple and straightforward. Momentum Trading is one such strategy where a trader identifies stocks with substantial value movement, either upwards or downwards, and capitalizes on it.

In the case of upward momentum, a trader can sell their stocks to yield higher returns. Mr. A, for instance, sold 3000 shares of S Private Limited at Rs. 60, and then sold the remaining shares at Rs. 65, resulting in a profit of Rs. 90,000.

When the market shows downward momentum, a trader can purchase a considerable volume of stocks to sell when their price increases. This strategy requires careful analysis of market trends and timing to maximize profits.

Day trading involves purchasing and selling stocks in a single day, typically between 9:15 am and 3:30 pm on a weekday.

It's a popular strategy for capitalizing on small-scale fluctuations in stock values. Day traders need to close their transactions before the market closes.

To succeed in day trading, you need proficiency in market matters and a thorough understanding of market volatility. This style of trading is mostly performed by experienced investors or traders.

Day traders typically hold stocks for a few minutes or hours, making it essential to be keen on stock values and market trends.

Scalping is a type of trading that involves reaping small profits repeatedly in a single market day.

Scalping typically yields a dozen to a hundred profits in a single market day, making it a high-frequency trading strategy.

The holding period of securities in scalping is shorter compared to day-trading, with individuals holding stocks for a maximum of a few minutes.

This short holding period allows for the frequency of transactions, which is a key feature of scalping.

Scalping requires market experience, proficiency, awareness of market fluctuations, and prompt transactions.

Taking your time to buy is a great way to reduce exposure to price swings. This can be achieved through dollar-cost averaging or buying in thirds.

You can also look into high-dividend stocks, which pay out a portion of earnings to investors.

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.

Taking things slowly and ignoring 'hot tips' can help you manage stock trading risks safely.

Momentum is a trading strategy that involves capitalizing on a stock's movement, either upwards or downwards. A substantial value movement of stock can be a great opportunity for traders to make profits.

In the case of upward momentum, a trader sells their stocks to yield higher than average returns, as seen in the example of Mr. A who sold 3000 shares of S Private Limited at Rs. 60 on the first day.

Mr. A's decision to sell 3000 shares at Rs. 60 and the remaining shares at Rs. 65 resulted in an overall profit of Rs. 90,000. This demonstrates the potential of momentum trading in generating substantial profits.

A trader can exploit downward momentum by purchasing a considerable volume of stocks to sell when their price increases, just like Mr. A did with S Private Limited.

Risk management is a crucial aspect of equity trading. It's essential to take things slowly and ignore "hot tips" to do it safely.

To lower risk, you can build positions slowly by buying stocks through dollar-cost averaging or buying in thirds. This helps reduce exposure to price swings. High-dividend stocks, which pay out a portion of earnings to investors, and ETFs, which allow you to spread your risk out among multiple companies, can also be good options.

A professional trader's ultra-competitive performance-based career may be cut short during generalized stock market crashes. Stock market trading operations have a high level of risk, uncertainty, and complexity, especially for inexperienced stock traders/investors.

Stock speculators/investors face several costs, including commissions, taxes, and fees for brokerage and other services. These costs can vary depending on the jurisdiction and may be incorporated into the stock price.

Stock market volatility can trigger mental health issues such as anxiety and depression. Seasoned stock traders and investors generally achieve a level of psychological resilience to deal with these detrimental factors.

To manage risk, it's essential to set a stock trading budget. Even if you're great at trading stocks, putting more than 10% of your portfolio in an individual stock can be risky. You could potentially lose 50% of your money overnight if all of it is in one stock.

Here are some common do's and don'ts:

To place a trade, you'll need to use either a market order or a limit order. A market order buys or sells the stock ASAP at the best available price.

A limit order, on the other hand, buys or sells the stock only at or better than a specific price you set. This means the order will go through only if the stock's price falls to or below that amount.

To determine which type of order to use, consider your goals and risk tolerance. If you're looking to act quickly and get the best possible price, a market order might be the way to go. But if you're willing to wait for the right price, a limit order could be a better option.

Market and Limit Orders are the two most common types of orders used in stock trading. They dictate how your trade goes through, and it's essential to understand the difference between them.

A market order is used to buy or sell a stock as soon as possible at the best available price. This means that your trade will be executed immediately, and you won't have control over the price.

Limit orders, on the other hand, allow you to set a specific price at which you're willing to buy or sell a stock. For a buy order, the limit price will be the most you're willing to pay, and the order will only go through if the stock's price falls to or below that amount.

To illustrate this, consider using a paper trading account to test your trading skills. By setting a limit order, you can practice buying or selling a stock at a specific price and see how it performs over time.

Here's a summary of the two order types:

By understanding the difference between market and limit orders, you'll be better equipped to make informed trading decisions and achieve your investment goals.

When choosing a trading platform, consider the fees associated with each exchange. Some exchanges, like Coinbase, charge higher fees for smaller transactions.

The location of the exchange can impact trading costs and regulatory requirements. For example, exchanges in the US are subject to stricter regulations than those in other countries.

Some popular exchanges for trading cryptocurrencies include Coinbase, Binance, and Kraken. These exchanges offer a range of features and fees to suit different trading needs.

Fundamental analysis is a crucial step in evaluating a company's financial position before making an investment decision.

You need to thoroughly analyze financial statements such as a balance sheet, income statement, cash flow statement, or even a statement of retained earnings to get a clear picture of the company's performance.

An equity trader looks at financial metrics like profit margin, quick ratio, and receivables to determine whether a company is a worthwhile investment.

These metrics provide valuable insights into a company's ability to generate revenue, manage its finances, and stay afloat during difficult times.

By carefully examining a company's financial health, you can make informed investment decisions that minimize risks and maximize returns.

Stock trading as a career can be challenging, but also highly rewarding. Professional stock traders may advise shareholders and help manage portfolios.

To become a stock trader, you'll need to complete an internship of up to four months, followed by passing a Financial Industry Regulatory Authority-administered exam, such as the Series 63 or 65 exam. This demonstrates familiarity with U.S. Securities and Exchange Commission (SEC) compliant practices and regulation.

Stock traders with experience usually obtain a four-year degree in a financial, accounting, or economics field after licensure. In fact, supervisory positions as a trader may require an MBA for advanced stock market analysis.

Stock trading as a profession can be a challenging but rewarding career.

Stock traders may advise shareholders and help manage portfolios, engaging in buying and selling bonds, stocks, futures, and shares in hedge funds. They conduct extensive research and observation of financial markets through economic and microeconomic study.

This is accomplished through economic and microeconomic study; consequently, more advanced stock traders will delve into macroeconomics and industry-specific technical analysis to track asset or corporate performance.

Other duties of a stock trader include comparison of financial analysis to current and future regulation of their occupation.

Professional stock traders who work for a financial company are required to complete an internship of up to four months before becoming established in their career field.

In the United States, for example, internship is followed up by taking and passing a Financial Industry Regulatory Authority-administered Series 63 or 65 exam.

Stock traders who pass demonstrate familiarity with U.S. Securities and Exchange Commission (SEC) compliant practices and regulation.

Stock traders with experience usually obtain a four-year degree in a financial, accounting, or economics field after licensure.

Supervisory positions as a trader may usually require an MBA for advanced stock market analysis.

The U.S. Bureau of Labor Statistics (BLS) reported that growth for stock and commodities traders was forecast to be greater than 21% between 2006 and 2016.

In that period, stock traders would benefit from trends driven by pensions of baby boomers and their decreased reliance on Social Security.

U.S. Treasury bonds would also be traded on a more fluctuating basis.

Stock traders just entering the field suffer since few entry-level positions exist.

While entry into this career field is very competitive, increased ownership of stocks and mutual funds drive substantial career growth of traders.

Banks were also offering more opportunities for people of average means to invest and speculate in stocks.

The BLS reported that stock traders had median annual incomes of $68,500.

Experienced traders of stocks and mutual funds have the potential to earn more than $145,600 annually.

Trader Risks can be a real challenge, especially for those just starting out. Taking things slowly and ignoring 'hot tips' can help you manage stock trading risks safely.

Stock market trading operations have a high level of risk, uncertainty, and complexity. This is especially true for unwise and inexperienced stock traders/investors seeking an easy way to make money quickly.

There are multiple types of risks that are involved with equity trading. Systematic risk is the risk that is inherent in the equity markets and therefore common to all stocks.

Unsystematic risk is the risk that is specific to an individual stock or company. Three broad categories of risks that affect the equity markets are political, interest rate, and regulatory risk.

Stock gains are generally taxed at two levels in the United States. For long-term capital gains, the tax rate is currently 20% for stocks sold after a minimum of one year's ownership.

For short-term trades, capital gains are taxed at one's ordinary tax rate, which can be as high as 35%.

Equities sales & trading is more geared toward "micro" analysis, focusing on individual companies. This could be a good fit if you're interested in trading derivatives based on companies' stocks.

If you're more interested in the math/programming side, you can work on technology to automate the job or focus on complex products like exotics.

The sales side of equities trading depends on the product(s) you're most interested in pitching to clients. If you've always followed individual companies, Equities or Equity Derivatives could work well.