You are searching the internet to find ways to multiply your capital and create wealth for your retirement or accumulate funds to meet near- or long-term objectives. You consider traditional investment options like fixed deposits an old investment option, as the returns cannot match inflation. You have heard from your friends about the stock market and equity trading as methods of investing, offering an opportunity to make money while taking risks in a short time frame, but you are not entirely sure how it all works. Don’t worry; you are not alone. Many people are curious about the stock market and wonder how they can get involved. So, let’s walk you through it.
What is Equity Trading?
Equity refers to holding an ownership stake in a company in the form of shares, while trading involves buying and selling shares without holding them for years. Equity trading occurs on the secondary market for companies listed on either or both the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).
The primary purpose of equity trading is to purchase shares at lower prices and sell them when the price rises.
How does Equity Trading Work?
Suppose there is a company named XYZ Ltd that wants to raise funds from the public. To proceed, they launch the IPO and introduce their shares for subscription in the primary market. Once the IPO dates are open, investors subscribe to shares in lots and they are allotted based on a lottery system. After allotment, shares are listed on the exchange and become available for sale and purchase in the secondary market. This is where the concept of equity trading kicks in.
Now, when the IPO subscribers sell their shares to benefit from the listing day gain, traders purchase them in the secondary stock market. Depending on the market interest in XYZ company shares, its price keeps fluctuating, giving opportunities to traders to profit from the price difference.
What are the Benefits of Equity Trading?
Investing in equity trading comes with various benefits; here are some:
- Equity trading offers you a powerful tool to build wealth over time. Investing in well-performing stocks can benefit from capital appreciation as the stock value grows.
- You can earn regular income through dividends when you put your capital in equities. Companies make these payments from their profits.
- Equities are one of the most liquid investments. You can acquire or sell stocks on the exchange and quickly access your money when needed.
- When you trade equities, you own a part of the company. If you hold a significant portion, this ownership gives you voting rights in major decisions and a share in the company’s growth.
- Equities often outperform inflation in the long term. Inflation reflects a consistent rise in prices, which erodes the currency’s purchasing capacity and raises living costs. With equity returns, you can keep up with the rising prices and improve your purchasing power.
- Equity trading allows you to diversify your portfolio by investing in different sectors and companies. This reduces risk while increasing the likelihood of achieving stable returns.
- Long-term equity investments are taxed at a lower rate compared to short-term gains. This allows you to keep more of your profits.
Step by Step Guide to Start Equity Trading
To start equity trading, consider the following steps:
- Step 1: Select a stockbroker or trading platform that offers access to the stock market. Ensure the broker is enrolled with the Securities and Exchange Board of India (SEBI) for reliability.
- Step 2: Open demat account. This account is necessary to hold your shares electronically. To open it, you must furnish documents such as identity proof, address proof, and bank details.
- Step 3: Study the market trends and financial health of companies you are interested in. Use tools and platforms for technical and fundamental analysis.
- Step 4: Once you have selected stocks, place your order via your trading account, either as a market or limit order and monitor its performance regularly.
- Step 5: Track market news and company reports, and adjust your holdings accordingly if there is a major update that could affect the returns.
Best Equity Trading Strategies
For successful trading in the stock market, consider the following strategies:
Scalping
Scalping requires you to make quick trades to capitalise on small price fluctuations in stocks. You take multiple positions throughout the day and keep them open for seconds or minutes. The idea is to gather small profits that eventually accumulate.
Suppose you are trading XYZ Company’s shares. The price fluctuates between ₹100 and ₹101 every few minutes. You purchase 1,000 shares at ₹100 and sell them at ₹100.50, making ₹500. You continue this strategy throughout the day, profiting in small amounts each time.
Arbitrage Trading
Arbitrage trading allows you to profit from price disparities between different markets.
XYZ Company’s stock is trading at ₹100 on the BSE and ₹102 on the NSE. As an arbitrage trader, you would buy the stock at the lower price on the BSE and sell it at the higher price on the NSE. This way, you profit from ₹2 per share minus transaction costs.
For example, if you buy 1,000 shares of XYZ Company on the BSE at ₹100 each, you invest ₹1,00,000. Simultaneously, you sell 1,000 shares on the NSE at ₹102 each, earning ₹102,000. Your gross profit is ₹2,000 (₹1,02,000 – ₹1,00,000). After accounting for transaction costs, your net profit might be slightly lower, but you still make a profit.
Momentum Trading
Momentum trading involves purchasing stocks trending upwards and selling them when you believe they have reached their highest point. This strategy aims to benefit from the ongoing price movement.
Imagine you are tracking XYZ Company, a tech firm. You notice that XYZ’s stock price has been growing because of a series of successful product launches and positive market sentiment. You decide to buy shares of XYZ at ₹500 each, anticipating that the upward trend will continue. Over the next few weeks, the stock price climbs to ₹600. You believe the stock has peaked and decide to sell your shares, locking in a profit of ₹100 per share.
Position trading
Position trading is a strategy where you hold onto stocks for a long period, usually months or years. The aim is to take advantage of large price changes. It requires patience and market knowledge.
Conclusion
Equity trading offers a thrilling way to engage with the stock market and build wealth over time. Mastering equity trading basics, risk management, and smart investing empowers informed decisions, accelerating your progress toward financial goals. Whether you are eyeing long-term growth or seeking short-term opportunities, equity trading opens doors to a world of potential profits with the right knowledge and approach.
