What is Trading in Stock Market? How many Types of Trading in Stock Market?
When I started my journey in the stock market a decade back I was unsure which type of trading should I test my luck as a newbie. It’s obvious when we are new to some things we tend to make mistakes so here are details of How many types of trading in the stock market you can do as sound investors and which one would be suitable for you. So that you don’t do a mistake and start aversing the stock market. But before we understand types and let’s check out What is trading in the stock market.
What is Trading in Stock Market?
Stock Trading involves buying and selling securities in an attempt to generate profits. To start with trading as an investor you need extensive research, often devoting hours a day to time the market. Also, you need to be aware of the market developments which will give you various trading ideas. Investing in equity is considered a lucrative investment as the return of investment is high as compared to other investment classes. In case you build up a diversified portfolio it will help you reap inflation-beatable returns. Therefore, trading in the stock market is also a way to invest in the country’s economy and profits from the highs.
It’s a little risker as compared to other investments but if you look at the returns you at least attempt to be a successful investor by choosing the right trading style which suits your goals and current responsibilities. As the share price of a stock depends on the demand & supply of the shares. In case there is a sudden price drop due to adverse news about a company. Then as investors, you need to either exit the current position or hold it basis on its market performance. If you could not follow the market updates closely, it may turn out to be risky.
How many Types of Trading in Stock Market with Example?
Generally, there are five types of trading done in the stock market. These are:
Day Trading/ Intraday Trading
Day trading is generally taken up by active traders who buy and sell securities within the same day or even multiple times over a day. A successful day trading means which stocks to trade in on a particular day when to enter and exit the stock. The main objective of this type of trading is to take advantage of small price movements in highly liquid stocks. They need to close the position at the end of each day.
This trading style is suitable for traders who are proficient with the stock market & have a thorough understanding of market volatility. Therefore, suitable for experienced investors who can invest in timing markets or traders.
Delivery Trading/ Position Trading
This type of trading is done to keep a long-term horizon. That means, the investors will buy and hold the stock for a long period to book profits. This type of trading is suitable for beginners or investors who can’t devote time every day to the stock market. However, before buying a stock you need to do extensive fundamental research so that your investment goal should match with the company’s growth plan. As per trading style, you’re supposed to buy stocks when you see an emerging trend and sell it when it reaches their peak.
Swing trading refers to the style of trading in which traders hold the stocks for a maximum of a week times. Traders try to gauge the movement pattern of the stock so that they can meet their short-term objective of making gains. The gains may be smaller, but when compounded over time, they can add up to excellent annual returns. By doing swing trading you may have a few transactions on some days and none on others. Instead of constant monitoring, positions can be checked regularly or handled with alerts when critical price points are reached. This will enable you to diversify your investments while maintaining a level head.
Momentum Trading in Stock Market
As the name suggests, you need to keep the rigor live so that you can capitalize on the movement of stocks, either upward or downward. As a trader, you need to identify such stocks that are either breaking out or building up. Once you have identified the stocks, you need to devise the entry and exit strategy so that you can make enough profit from the given momentum.
In case of upward movement, you should start selling the stocks to yield higher returns than average ones. On the other hand, in case of downward momentum, you purchase a considerable number of stocks so that when the market goes up you can sell them at a higher price.
Scalping is a type of trading that involves buying and selling equity in a matter of seconds or minutes. This micro trading seeks to profit from small price changes. A scalper typically executes hundreds of trades per day to profit from minute price differences. Beginners should exercise caution when executing such trades because they require a great deal of attention and skill. Scalping also necessitates that the trader is strict with their exit strategy, as one large loss can easily wipe out the day’s many small wins.
Stock trading is not the cup of tea for everyone. Thus, you need to figure out what works for you depending upon your investment goal, the time you can devote to trading, investment horizon, your risk profile and how do you perceive the stock market. All these factors will determine which trading style you should opt for. Once you identified your trading style you can do extensive research about the stocks you would like to trade in and keep yourself updated about the market happenings so that you don’t wash out your profits.