What is Trading ? Complete Guide and Easy Ways to Get Started: There are two main ways to make money in the stock market. The first way is by buying shares and investing, and the second is by trading stock or index options. People usually trade in Nifty and Bank Nifty. In this article, we will explain what trading is, how many types of trading exist, and how it is done.
These days, we see people making millions of rupees through online trading in the stock market. This raises the question, what exactly is trading and how can money be made from it? If you also want to earn a lot of money by trading, you’re in the right place.
In this article, I will provide you with complete information about trading, such as what trading in the stock market is, how beginners can learn trading, how trading is done, the different types of trading, and how to make money by trading in the stock market.
Additionally, I will share some important points related to trading. I promise that if you read this article till the end, you will have no doubts about trading.
What is Trading?
Trading is the process of buying and selling goods and services to make a profit. People who engage in trading are called traders. The goal of trading is to buy things at a lower price and sell them at a higher price to earn a profit.
Just like in everyday life, trading means doing business, where a person buys something and later sells it for a profit. This is called trading (merchant).
Similarly, in the share market, trading refers to buying company shares at a lower strike price and selling them at a higher price, which is known as option trading.
Do you know why option trading was introduced? Let me explain. People used to buy company shares and hold them for a long time, but sometimes the share prices would suddenly drop.
To prevent investors from losing money, option trading was introduced to help protect them. However, as people’s interest in it grew, index trading was also introduced, such as Nifty, Bank Nifty, Fin Nifty, etc.
What is Trading in the Share Market?
Trading in the stock market means buying and selling shares. There are two types of trading in the stock market: short-term trading and long-term trading. Most traders engage in intraday and options trading to earn quick profits from the stock market.
Example of Trading
Trading is present in almost every type of business today, whether online or offline. In trading, both the buyer and the seller aim to make a profit.
For example, in the stock market, the goal is to buy shares at a lower price and sell them at a higher price to make a profit.
Remember This – Online trading is not limited to the stock market; it also takes place in the commodity market and the Forex market. In the commodity market, trading involves items like gold, silver, and crude oil, while in the Forex market, currencies such as the rupee, dollar, and pound are traded.
So far, you have learned what “Trading” is. Now, let’s move forward and understand how trading is done.
How is Trading done?
In the stock market, trading is done by buying and selling options. There are two types of traders: one who buys options and the other who sells them. The person buying the option is called the Buyer, and the person selling the option is called the Seller or Writer. In options trading, the option writer generally makes more money.
The option writer earns more than the buyer because, even if the market stays within a range (also called sideways), the option writer can still profit.
On the other hand, the option buyer only makes a profit if the market moves in their direction. For example, if the option buyer has bought a call option, they will only make money if the market goes up. If the market moves sideways, the option buyer won’t make any profit, and they could even lose money as the premium decreases over time.
Now, let’s discuss the types of trading. When you buy shares, you can hold them for as long as you want, but options trading has a limited time frame. For stocks, this time is usually one month, while for indexes, it can be one week, two weeks, or a month.
In the previous paragraph, you must have learned what trading is and how it is done. Now, let’s explore how many types of trading there are.
Types of Trading
There are two types of trading – short-term trading and long-term trading. Short-term trading includes intraday, swing, and option trading, while long-term trading includes delivery and positional trading. Additionally, scalping trading, algo trading, margin trading, and Muhurat trading are also types of share market trading.
Among all these, the three most popular types of trading are:
- Intraday Trading
- Swing Trading
- Option Trading
We will discuss these in detail below. But first, let me briefly explain the other types of trading.
Types of Trading in Share Market
Long Term Trading
This includes delivery and positional trading. In delivery trading, you buy shares for delivery, while in positional trading, you hold a position in a particular stock for the short or long term.
Some of you might be thinking that delivery trading is the same as investing, so why is it called trading? Yes, you are correct; it is investing. However, in the long term, you will eventually sell the shares, and buying and selling shares is what makes it trading. Therefore, investing can also be called long-term trading.
Scalping Trading
The term ‘scalping’ refers to illegal or unethical trading, where trades are made in a way that goes against the rules of the stock market. This type of trading is called ‘scalp trading.’
This means that, in the stock market, shares are typically bought with the expectation of their value increasing. However, in scalping trading, there is no such expectation, as traders book profits immediately.
Scalping is a short-term strategy where traders buy and sell shares within a few minutes to make a profit. It is different from intraday trading in some ways.
Algo Trading
In algo trading, there is no need for people, as trading is done automatically through computers using algorithms and software.
Margin Trading
When you trade a particular stock with margin through your broker, it is called margin trading or leverage trading.
Margin means money that you haven’t paid yourself, but your broker is providing you for trading.
Margin trading is now available in almost every broking app, offering margins ranging from 20% to 80%.
However, remember that margin trading involves higher risk. If you incur a loss, your broker can charge you significant fees. Therefore, only use margin trading when you have full confidence in your trade.
Muhurat Trading
As the name suggests, Muhurat trading is done during an auspicious time. It usually takes place during festivals like Diwali, where trading is done during a specific, favorable time.
Now, let’s talk about the types of trading that are the most popular.
1. Intraday Trading
Trading where you buy and sell shares on the same day is called “Intraday Trading.” In this, you must buy and sell the shares within the same day.
If you buy shares in intraday trading and don’t sell them before the stock market closes at 3:30 PM, your broker will automatically “square off” your position, meaning they will sell all the shares you bought that day. You may also have to pay extra charges because you didn’t sell your shares before the market closed.
To do intraday trading successfully, it is important to understand chart patterns. Every intraday trader tries to predict what the next candle on the chart will look like.
- In intraday trading, most people trade using 1-minute, 5-minute, and 15-minute charts.
- It is not necessary to research companies, but having some knowledge of technical analysis is important.
- Compared to delivery trading, intraday trading offers better margins, but it also carries higher risks.
- An intraday trader makes profits by using various chart patterns, support and resistance levels, targets, stop-losses, moving averages, and other trading setups.
- In intraday trading, you don’t need to find stocks with strong fundamentals; you can trade even with stocks that have weak fundamentals, as long as they have good volume.
- It is said that intraday trading carries a high risk of loss, which is true. However, by using stop-loss wisely, understanding trading psychology, and following intraday trading strategies, you can minimize your losses and increase your profits.
2. Swing Trading
Swing trading is the practice of buying and selling shares over a few days to a few weeks. In swing trading, most people sell their purchased shares once they make a profit of 5% to 20%, whether it takes one week or one month, it doesn’t matter.
- Swing trading is considered safer than intraday trading because it doesn’t require selling shares on the same day.
- To earn more profit from swing trading, it’s better to invest in Nifty Next 50 stocks, as they tend to have good volume and strong fundamentals.
- In swing trading, unlike intraday trading, you need to choose fundamentally stable companies because you’re looking to earn profit over a few days or weeks, not within minutes or hours, and you don’t want to take high risks.
- Support and resistance levels are very important in swing trading, and you make profit by trading around these levels. Many stocks trade consistently between their support and resistance, and by taking positions in such stocks, you can earn good money from swing trading.
- Some people also make money from swing trading by capitalizing on stock breakouts or when they reach breakeven. A breakout in a stock chart means it has broken its previous support or resistance, meaning the stock has moved significantly above or below its previous price.
3. Option Trading
Option trading refers to the buying and selling of call and put options. Buying a call option means that you are bullish on the stock market, while buying a put option means that you are bearish.
- Option trading is considered very risky because in just a few minutes, you can make or lose lakhs of rupees, as the premium prices on charts fluctuate rapidly. To start option trading, you need very little money.
- sometimes as low as 100 rupees. You can make money by either buying or selling options.
- In the stock market, 80% of traders are option buyers, while only 20% are option sellers. This is because option buying allows you to start with as little as 100-200 rupees, whereas option selling requires a much larger investment.
- It is important to know that 75% of option sellers make money, while only 25% of option buyers make a profit. This is because option sellers have more capital and make smaller profits, while option buyers, with less money, expect larger profits, which is why they often face losses.
- Option sellers make money because they invest more money for smaller profits, while option buyers face losses because they invest less money but expect larger returns. When trading options, always set a stop loss, or you could lose a large amount of money in just a few minutes.
- It is essential to trade based on your risk management strategy.
Friends, I want to tell you that you should never do option trading without learning it first. While you might make some money in the short term, in the long term, you will likely face losses.
Note- I want to tell you one more thing: never take a loan to do option trading, because many people have already lost everything by doing so. So, first learn it properly, understand it, get a good grasp of trading psychology, and learn all the basic rules. Only then should you start with a small amount of money.
So far, you have learned what trading is and the types of trading. Now, let’s understand how trading works in the stock market.
How does Trading work?
In the stock market, trading works based on the buying and selling of shares by buyers and sellers. The rules of demand and supply apply in stock market trading. When there is high demand for a stock, its price starts to rise. Conversely, when the demand for a stock is low, its price tends to fall.
To understand how trading works, it’s important to know about trading volume.
If there is high buying volume and low selling volume for a stock, the price is likely to go up. On the other hand, if the situation is reversed, the price will likely fall.
Additionally, to understand how stock prices move up and down, pay attention to the Bid and Ask prices. The Bid price is the price at which a buyer is willing to purchase the stock, and the Ask price is the price at which a seller is ready to sell it.
Trading in a stock is not possible unless the Bid and Ask prices match. This means that a trade can only happen when a buyer agrees to the seller’s price.
This is why some stocks don’t trade for a long time—there are very few buyers and sellers. If someone buys a large quantity of such stocks, their price can rise quickly, and the stock may even appear in the news.
You might have noticed that when a Foreign Institutional Investor (FII) buys a stock, many others also invest in it, causing the price to increase rapidly, only to fall again after a few days.
In this scenario, swing traders make good profits because they benefit from the movement in the stock. For now, just remember that if buyers are strong, the stock will go up, and if sellers are strong, the stock will go down.
What does Trading involve?
Trading includes many aspects of technical analysis, such as chart patterns, moving averages, support and resistance, indicators, volume, price action, and the put-call ratio, among others.
If we look at these individually, trading is a vast field with many components.
For example, chart patterns come in various forms, and learning them can take weeks or even months.
Similarly, there are many types of indicators, and my favorite is the RSI indicator. Moving averages also come in different types.
When looking at candlestick chart patterns, there are many types of candles, each with a different meaning.
In this way, trading involves many elements. However, to be successful in trading, you need to focus and gain strong expertise in one area.
By now, you have learned what trading is, the different types of trading, how it works, and what is involved in trading. Now, let’s understand how trading is done in the stock market.
How to Trading in the Stock Market?
To start trading in the stock market, the first step is to open a Demat account with a broker. After that, you need to add funds to your trading account. Once that’s done, you can choose any stock and begin trading.
Zerodha and Upstox are the best discount broker apps for trading. I personally use Upstox for my stock trading.
If you want to do options trading, you’ll need to activate the F&O (Future and Option) segment in your Demat account. Only then can you start trading options.
It’s up to you whether you want to do intraday trading, swing trading, or options trading. Based on that, you’ll need to create your own trading strategy.
While trading, keep these things in mind
- It’s very important to control your mindset while trading.
- Never trade when you are too sad or too happy.
- Start trading only when you are fully prepared and ready to trade.
- If you are facing continuous losses, you should take a break from trading for the day.
- Decide in advance how many times you want to trade today and what is the maximum loss you are willing to take.
- Psychology plays a big role in trading. For example, if you lose in three trades in a row, you might feel the urge to trade again to recover your losses. Many people fall into this trap and end up losing even more due to frustration.
- If a stock is continuously rising, sell some of your purchased quantity. As it keeps going up, sell the remaining quantity to lock in profits. Some people wait for the stock to rise even more, but when it suddenly falls, they regret not selling earlier.
- You should have the mindset that if a stock goes up by 10% from the price you bought it at, you should never sell it at a loss.
Rules of Trading
To succeed in stock market trading, make sure to follow these rules:
- Never trade with a loan in the stock market, as it can lead to serious problems.
- To be successful in trading, you must first learn it. People who trade without learning will never become successful traders.
- Always check the brokerage charges and fees in your trading app before starting.
- Never buy a stock just because its price is going up, as it might be artificially inflated by an operator.
- Never invest all your money at once, especially in options trading.
- Always set a stop loss when trading.
- Don’t be too greedy. Set a clear mindset to exit once you make 10% or 20% profit.
- Trade with discipline and follow the rules you’ve set.
- Decide in advance at which levels you will enter and exit a trade.
How to learn Stock Trading
To learn trading, you need to understand technical analysis, candlestick chart patterns, and price action. Additionally, you can also learn by reading online trading courses and books.
Read Trading Books
There are many books available on stock market trading. Before buying a book, decide what type of trading you want to learn, such as options trading, intraday trading, or others. Then, check the online ratings and reviews of the book.
Practice Paper Trading
If you don’t want to take risks initially, you can start with paper trading. This means watching the live market and writing down the stock prices’ buying and selling levels, support and resistance, and amounts on paper. After some time, check whether you made a profit or a loss. When you are making a profit 7 out of 10 times, you can try live trading.
Some people say paper trading doesn’t work for psychology, which is partly true, but it helps you practice without any risk. I believe that if you are consistently losing in paper trading, you’ll lose even more in the live market.
Learn Through Online Trading Courses
There are many online trading courses available, but before taking any course, check its ratings and reviews. I recommend watching free stock trading videos on YouTube channels instead of paying for courses. Nowadays, there’s so much free content online that you can learn anything you want.
How to make money from Trading?
To make money from stock market trading, you need to buy stocks at low prices and sell them at higher prices. If you can predict the price movement of a stock in advance, you can make good money from trading.
The difference between the buying price and the selling price is your profit or loss, and the key to trading is in buying and selling.
If you buy a stock below its intrinsic value, your chances of losing money are much lower. However, in trading, intrinsic value is not as important as it is for value investors.
As I mentioned earlier, if you can predict the next candle on the chart, you can make a lot of money from trading.
I know no one can predict the chart with 100% accuracy, but there are many traders who can predict charts with 70-80% accuracy.
They are able to do this because of years of hard work and experience in trading. With consistent practice, you can also become an expert in chart prediction over time.
Advantages and Disadvantages of Trading
Below, I have mentioned some advantages and disadvantages of trading.
Advantages of Trading
- By trading, you can earn more money in a short amount of time.
- You don’t need any professional degree to learn trading.
- There are many online trading software platforms that give you fake cash to practice trading in the live market.
- In trading, your loss is limited to the capital you invest, while your profit potential is unlimited.
- You don’t need to go anywhere to trade. You can trade from your mobile at home and earn lakhs of rupees in a day.
Disadvantages of Trading
- If you don’t set a stop loss while trading, your capital could quickly drop to zero.
- When you trade using margin, your risk increases even more.
- Some people don’t fully understand the brokerage charges, which often means their profits are wiped out by the charges.
- The reality of trading is that many more people lose money than make it, and the main reason for this is trading without proper knowledge.
What should you keep in mind before Trading?
1. Be cautious when trading based on news.
Many people trade based on news, meaning they buy stocks when good news comes out about them. After some time, when others start investing in the same stock due to the news, the stock price increases, and they sell to make a profit.
While some people make good money trading on news, you should know that false news spreads quickly in the stock market. Poor companies are often promoted on social media, trapping small retail investors while operators take all the money and run.
2. Avoid trading in stocks that have circuit limits.
Circuit breakers mostly occur in penny stocks. There are two types: Upper circuit and Lower circuit.
These stocks are controlled by operators who suddenly increase the price of a stock.
When small investors start investing in these stocks, the stock price seems to rise. Once the price reaches a high level, the operators sell all their shares, causing the stock to hit a lower circuit. This means no investor can sell their shares, and they get stuck in that stock. This is also called a “pump and dump” scheme.
What is the difference between trading and investing?
- In trading, you need to focus on technical analysis, while in investing, you focus on fundamental analysis. When trading,
- it’s important to look at price action and charts, whereas in investing, you need to understand the company’s business model.
- In trading, you check the stock’s price history, while in investing, you analyze the company’s past performance.
- Trading helps you make money in the short term, whereas investing is for long-term gains.
What is Trading FAQ’s
What is Trading?
Trading is the process of buying and selling financial instruments like stocks, bonds, and commodities. The goal is to profit from changes in market prices.
How many types of trading are there?
There are several types of trading, including day trading (buying and selling within the same day), swing trading (holding stocks for a few days or weeks), and long-term investing (holding stocks for months or years).
Do I need a lot of money to start trading?
No, you don’t need a large amount of money to start trading. Many brokers allow you to begin with a small investment. However, it’s important to understand the risks and invest wisely.
What is technical analysis in trading?
Technical analysis involves studying past price movements of stocks or markets using charts and indicators to predict future price trends. It focuses on analyzing patterns and trends.
How do I manage risk in trading?
To manage risk in trading, it’s essential to use stop-loss orders, diversify investments, choose appropriate position sizes, and avoid investing more than you can afford to lose. Proper risk management helps prevent significant losses.
Conclusion
I hope that after reading this article, you have gained a detailed understanding of trading. If there’s any information missing, I will make sure to update it in the article. I hope you liked this post. If you did, please share it as much as possible. If you have any complaints or need more information related to this post, feel free to ask in the comments section.
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