Let me share a personal story. One of my friends showed a keen interest in stock market trading after we completed our master’s degree. Belonging to a middle-class family, his father was a strong believer in safe investment avenues, so we had a tough time convincing him otherwise.
Finally, he agreed, but only on the condition that my friend would first learn and get a complete understanding of the stock market before taking the plunge.
The stock market is indeed volatile, but there are ways to get around risks. Read on to learn more about stock market trading.
Understanding Stock Market Trading
In simple words, trading in the stock market is the buying and selling of shares of a company. For example, if you buy 10 shares of XYZ Ltd at ₹100 each, you spend ₹1,000. Now, if the share price touches ₹120 and you sell them, you earn a profit of ₹200.
The difference between stock trading and investment is that trading is done with the aim of making quick profits, whereas investment is made for long-term capital appreciation.
With VectorVest‘s comprehensive analysis tools, traders can efficiently identify undervalued stocks with strong fundamentals, maximizing their potential for profit through value investing strategies. This approach can be particularly beneficial for individuals planning for retirement, as it provides a method to build a diversified portfolio of assets with the potential for long-term growth and income generation.
Types of Stock Market Traders
Here’s a look at some of the common types of stock market traders. Which one are you (or aspire to be)?
- Fundamental trader: One who focuses on company-specific events to decide whether to buy and when to buy it.
- Technical trader: A trader who uses charts, graphs, are other tools to understand past performance and make decisions based on historical data.
- Noise trader: These traders do not refer to any fundamental data; instead take advantage of economic trends and engage in short-term trades to earn profits.
- Sentiment trader: A trader who combines fundamental and technical analysis and participates in market movements.
- Market timer trader: They try and guess whether the stock will go up or down and take advantage of the movement to earn profit.
- Arbitrage trader: One who tries to earn profit from pricing differences of similar instruments in different markets or in different forms.
Top Trading Strategies
A stock market trading strategy is like a plan to make trading decisions. When you start trading, you encounter several strategies; some common trading strategies are discussed below.
Intraday Trading Strategy
As the name suggests, an intraday trading strategy is one wherein you buy and sell the stock within the same day. Also known as Day Trading, this strategy involves taking advantage of price fluctuations that take place throughout the day. If you do not close your intraday position within the trading hours of the same day, the position gets squared off automatically.
Swing Trading Strategy
This strategy also involves profiting from short-term price movements, but it typically lasts for a few days or weeks. Traders use technical analysis tools to identify entry and exit points.
Value Investing Strategy
In this strategy, traders or investors identify and purchase stocks whose actual price is lower than their intrinsic value. Once the stock surpasses or reaches its intrinsic value, the buyer sells the stock. Typically, investors look to invest in companies which have good fundamentals, meaning, stable earnings, low debt ratios, strong cash flows, etc.
Momentum Trading Strategy
Usually, to earn profit, you buy at low and sell at high. However, in a momentum trading strategy, you buy an asset at a high and sell it at an even higher price. Traders use tools to measure price fluctuations, calculate trends, and invest in assets which show significant price or volume movements.
Options Trading Strategy
Options and futures come under the derivative asset class. In option trading, the buyer or the seller has the right but no obligation to buy or sell (respectively) the underlying asset like stocks, commodities, ETFs, etc. Options are further divided into call and put options, and the strategies undertaken are divided into bearish, bullish and neutral strategies depending on the market trend.
Risk Management
Risk in the stock market is inevitable. The main idea is how to manage risk to effectively earn profits. Risk management in stock market trading involves considering factors that can impact your returns and taking steps to mitigate or reduce these risks.
Some common risk management techniques in stock trading are:
- Diversification
- Stop-loss orders
- Active portfolio management
- Hedging
Conclusion
The art of stock market trading will develop only gradually with commitment, dedication and willingness to learn. The best way to excel in stock trading is to choose the right trading platform that will enable you to develop a solid trading plan, manage risk and undergo a continuous learning process.
