Trading is a process in which a person buys and sells the stocks of companies. It helps you to multiply your wealth. There are four parties involved in trading such as buyer, seller, stock broker and stock exchange. Trading is classified into different categories such as day trading, swing trading, short term trading, long term trading, etc. It is classified according to the investment horizon.
Trader is a person who buys and sells financial instruments such as stocks, bonds and derivative.
Things to remember while Trading/ Investing
There are a number of things to note/ understand before investing in stock market. If you are not concentrating on these factors, the possibility of making mistake and losing your capital is very high. Following are the things to be remembered while trading or investing.
- Reliability of the Broker
- Experience of the Broker
- Commissions and Charges
- Don’t take quick decisions
Reliability of the Broker
Be sure your brokerage firm or investment consultant is licensed and regulated. Check with the proper authorities like SEBI (Securities Exchange Board of India).
Experience of the Broker
Work with brokers who have experience in the field and can prove it. Avoid consultants who have just started their financial planning practice in the recent years
Commissions and Charges
Find out how much fee and charges your brokerage firm will be imposing on you. Different brokerage firm charges different fee so it is better to have a cross check on this matter with different brokerage firms.
Don’t take quick decisions
Make buying or selling decisions only after proper analysis. Don’t take quick decisions that you are not prepared to make. If a financial adviser seems to be “forcing” you to take such quick decisions that you are not really needed understand he is not suitable for you.
Steps to make Profit from Stock market
- 1. Before selecting a broker you should do proper research online, through friends and family. Find a well-established brokerage firm.
- 2. Work with the firm’s investment consultant to customize your investments to suit your risk profile. If you have 10 to 20 years or more to retire, you may be able to be much more aggressive with your investment approach. If you are near to retirement age you should adapt defensive approach.
- 3. Once you have established your relation with a broker, be sure that you receive monthly or quarterly statements from them that update you on your investment’s performance. If needed, you can make adjustments to your portfolio.
- 4. Decide in advance with your consultant an annual or other time period in which you will sit down together to review your portfolio performance.
- 5. Review your profile always to see if your risk profile has changed, and make the necessary adjustments in your investments.
- 6. Be very clear about your investment objective
- 7. Make sure which kind of trader you are such as Day Trader, Swing Trader, Short term Investor or Long term Investor.
Types of Trading/ Investing
There are different methods of Trading and investment. People can select the method according to their income, savings, risk profile, investment horizon etc. There are different kinds of traders in the market. Before entering into stock market you should analyze all these factors and make sure which type trader you are. Major types of Traders in the market are given below;
- Day Trader
- Swing Trader
- Short term Investor
- Long term investor
Day trader is a person who makes the buying and selling of the stock in the same day. The difference between buying and selling price is his profit/ loss. A day trader should have a good risk profile. Possibility of making money and losing money is highly volatile in this kind of trading.
Swing Trader is engaged in Buying and selling of stocks. Their trading pattern is different from that of Day traders. A swing trader will trade (Buy/sell) stocks with a time horizon of 2-3 days. Many of the traders are using this pattern to make profit from the market. Swing Trading is comparatively less risky than Day Trading.
Short term Investor
Short term investment is suitable for investors with a time horizon of less than a year and average risk tolerance. Normally short term investors are undertaking less risk compared to first two categories of investors (Day Trading and Swing Trading). A short term investor will Buy and Sell the securities within month.
Long term investor
Long term investor is a person with an investment horizon with more than a year. Compared to other kinds of investments risk is less in Long term investments. A long term investor will be able enjoy all the benefits like capital gain, cash dividend, stock dividend, etc.
How Profit is generated from stock market
There are a number of ways through that one can make profit from stock market, like capital gains, right issue, etc. Investors can profit in the stock market through any or a combination of the following :
- Capital Gains
- Cash Dividend
- Stock Dividend
- Stock Rights
Capital Gains are profits made due to an increase in the market price of a stock from the buying price. Market price of a stock/share will keep on changing each moment. There is no guarantee that you can sell the shares at the same price you have bought or for a higher price. If you are able to sell the share for a higher price than its purchase price, you have made capital gain. For example; think you have bought the share of Reliance Industries for Rs. 1900 after few days you sold it for Rs. 2100. Here you have made a capital gain of Rs. 200 (i.e. 2100-1900=200).
There is a possibility of making capital loss also. If there is a decrease in stock price from the purchase price, it will lead to capital loss. For example; if you have bought the shares of Reliance industries at Rs. 1900 and after few days you sold it for 1700, you have to face a capital loss of Rs. 200 (i.e. 1900-1700=200)
Sometimes companies declare cash dividend to its share holders. Cash Dividend is a dividend given to shareholders in the form of cash. Apart from capital gains it is another form of revenue for an investor. Cash dividend is declared on the face value of the share. It is computed by multiplying the number of shares held by a person by the cash dividend rate declared.
For example; Mr. Arjun is holding 1000 shares of “X” company and the company is declared a dividend of 20% on its face value. Face value of the share is Rs. 10/-. In this case Mr. Arjun will receive a dividend of Rs. 2/- on each share (10 x 20% = 2) so total cash dividend of Mr. Arjun is Rs. 2000/- (1000 x 2 = 2000). Below given is a simple formula to find out the total dividend on the number of shares held.
Dividend = (Dividend Rate x Face Value of share) x No. of shares
Stock Dividend is a dividend given to shareholders in the form of additional stocks. It works similar to cash dividend, instead of cash, stocks will be issued to share holders. It is computed by multiplying the number of shares held by the percentage of the stock dividend declared.
Stock Dividend = No. of shares held x percentage of the stock dividend declared
Right Issue/ Stock Rights
Right issue is the option given to the existing shareholders of a company to buy additional shares of the company at a price lower than its market price. In other words when the company goes for further issue, it gives the first preference to the employees and the present share holders this is called right issue. Right issue helps in getting the shares at reduced price.