It is imperative to first understand the stock market and its functioning prior to making an investment. Also, every investor must have a well-defined trading strategy — be it a vague or a clear one, before entering the stock market, and effective execution of it paves a path for them to achieve better returns.
How does the share trading work?
Firstly, the stock market is the platform that allows investors to trade shares of multiple companies. The term shares or stocks or equities refers to the ownership of a specific company, which can be bought and sold in the share market.
Although there is a constant change in the share prices, for every certain period a price is set for these shares depending on the factors like the market value of the company, past growth history and current working condition of the company.
For trading stocks, the investors must possess a trading account, a demat account and a bank account beforehand. The entire trading of stocks takes place through the trading account of the investor.
Further, when an investor buys the securities of a company, the money gets debited from their bank account in return for shares. All these bought shares are stored in the demat account in an electronic format.
On buying the share of a specific company, the investor becomes a shareholder of that company and will have a say in the decision-making process of the company through voting rights. The investor would receive a fraction of the company’s profit as a dividend and will also bear losses that the company may incur.
When the share prices rise, the investor receives high returns and on the contrary, they might lose the invested money as well during losses.
How much is the earning capacity for an investor?
There isn’t any exact answer for this question, although it is said that the amount of earning depends on the trading methods and investment strategies chosen by the traders. But one key fact is that long term investment in the stock market almost always yields huge returns to the investors, multiple times their investment.
Again, the prices of stock are not constant and they are very unpredictable. This means one day, the share could be Rs. 10 and on another day, it may even rise to Rs. 200. So, it is advisable for investors to invest in low priced stocks and wait for an appreciation in the long run.
In addition to all the other factors, the trading method chosen by traders plays a key role in deciding an investor’s earning from the stock market.
Different types of trading
Delivery trading – Delivery trading allows the trader to store the bought shares in their demat account for as long as they can. They can buy a share, for instance, today and can sell it in the market at any point of their convenience.
This trading form allows for long-term investment and investors can hope for good returns in the long run. The delivery trading is considered to be comparatively secure. Although it can lead to high profits, a bad investment can cause a grave loss of around 90%.
Intraday trading – In contrast to delivery trading, this form of trading allows investors to buy and sell the same stock during the same trading day. Under this type of trading, there is not any permanent or long term investment.
So, there won’t be an issue of continuous risks as well as massive returns. However, if the trader has money in their bank account and is in loss, they can convert this into delivery trading.
Swing trading – This is a type of trading where the exit point is crucial for the investor. A trader buys a stock, earns gains, waits for the stock prices to go up and then sells that stock when the prices are high and profitable. In this form, there is no timeframe for selling the shares but investors must wait for high prices to earn good profit.
Option and future trading – Option and future are two different ways to trade in stocks. If one is trading in options, then the buyer of the option has no obligation to sell or buy. Whereas, trading a future contract means the investor is supposed to buy or sell a particular stock.
All in all, there is one governing rule of stock market trading i.e. to buy stocks at low prices and sell at high. This requires the investors to keep a tab on their portfolio, stay abreast of the changes in the market and get a thorough understanding of when to enter and exit the stock market.