Stock Market Trading: Meaning, History, Types & Process
Stock trading simply means buying and selling of stocks to profit from price fluctuations. This is distinct from investing in stocks after analysing their business, studying their financial statements, management guidance, etc.
Although stock market trading has attracted a lot of young people. But, there are a lot of things one should understand before entering into the arena of stock trading. This blog discusses its brief history, what does it mean?, various types of stock trading and how an individual can participate.
What is Stock Trading?
Stock trading refers to exchanging shares between a buyer and a seller at a defined market price.
There are two significant exchanges in India for such transactions – the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
History of Stock Trading in India
Stock trading in India was established in the 18th century when the East India Company started trading in loan securities. In the 1830s, it sold corporate shares in Bombay along with stock of banks and cotton presses.
Towards the beginning of the 1850s, 22 stockbrokers began trading opposite the town hall in Bombay under a banyan tree. With the enactment of the Companies Act in 1850, investors started showing interest in corporate securities.
It introduced the Limited Liability concept around this time. It resulted in an increased number of brokers, and in 1874; they finally shifted their location to Dalal Street in Bombay. Native Shares and Stockbrokers Association, an informal entity, organised itself as the Bombay Stock Exchange in 1875. It is Asia’s oldest stock exchange.
National Stock Exchange (NSE) came in 1994, to cater to the need for another stock exchange large enough to compete with BSE and need for transparency in stock market.
Types of Stock Market Trading
There are typically eight types of trading in the stock market which are as follows:
Day/Intraday Trading: Buying and selling stocks on the same day is known day/Intraday trading. These transactions generate gains or losses in a single trading session as before the market closes, traders exit their position from the stock.
This type of trading lasts for a few seconds, minutes or hours and can occur multiple times a day. Day trading has a high risk of losses if a trade is not well planned due to higher market volatility and the quick decision-making that a trader has to make.
Scalping: This trading technique involves high-speed trade execution, lasting for a few seconds to minutes. It is one of the fastest methods traders use to profit from a stock’s bid-ask spread.
It is the difference between the price a broker will buy a security from a scalper (the bid price) and the price the broker will sell it (the asking price) to the scalper because a scalper tries to capitalise on the mismatch between supply and demand, resulting in narrower spread.
BTST (Buying Today, Selling Tomorrow): This strategy encompasses taking a position in the stock during the last hour of the trading session and exiting in the first hour of the market opening on the next day of trading, implementing this kind of trading technique when there is news or an event that may affect the price of a stock overnight.
STBT (Sell Today Buy Tomorrow): It is opposite to the BTST trading system but is only possible with derivatives instruments. Traders use this trading strategy in times of uncertainty or when the market sentiments start going south.
Under this technique, a trader short-sells the underlying stock’s future before the closing session and repurchases it during the first trading session on the next day. He makes a profit by selling it at a higher price and later exiting at a lower price.
Swing Trading: These trades are based on the directional move of the stock price. A swing trade can last a few days to a month, depending on how long the stock price trends. The risk is considerably lower in swing trade when compared to day trading.
To become profitable from this trading strategy, a trader must have expertise in determining the stock’s correct price trend, i.e., whether there’s an upside or a downside trend.
Momentum Trading: Momentum trading is done based on candlestick patterns. Generally, a candlestick breakout or breakdown offers the perfect opportunity to take a momentum trade. Here, the goal of a trader is to find an uptrend with price volatility for a short period and sell off when it starts losing momentum.
Delivery Trading: In this type of trading, a trader holds a long-term horizon to keep a stock in his portfolio. These trades are generally cash settled trades, where the trader pays the entire margin to buy the stock. A trader must research a stock before executing a delivery-based trade.
Margin Trading: For margin trading, traders use a stockbroker’s borrowed funds and some form of collateral, such as shares, bonds, or ETFs, or even fixed-income instruments. Margin trading attracts interest on money borrowed from a broker.
Procedure of Trading Stocks in India
Here’s how you can trade stocks in India:
Step 1: Opening a Demat and Trading Account
Trading in the market requires opening a Demat account with a SEBI-registered stockbroker. This process involves documentation like providing a copy of an Aadhaar Card, PAN Card, cancelled cheque and a passport-size photograph.
The Demat account is opened under the depositories such as CDSL and NSDL to enable storing of financial securities such as shares, bonds, debentures, mutual fund units, etc. in a digital format.
The brokerage platform and the depository participant (DP) are intermediaries between the depository and the investor. The DP maintains investor’s securities accounts and informs them of transactions.
Step 2: Placing an Order
After opening a trading and Demat account, you can place an order to buy shares through a broker over the phone or online trading platform (Web or Mobile App). Then, you can set a limit order or market order. A limit order is a fixed price at which an investor wants to buy the shares. A market order is based on the spot trading price of a share.
For instance, Mr A wants to purchase shares of ITC Limited for ₹330, which is currently trading at ₹332. Here, if he wishes to wait till the price comes to ₹330; then in this case the trader needs to place a limit order. Similarly, let’s say Mr B wants to buy shares of ITC at market price; his order will be placed and executed immediately at the best-quoted price by the seller.
Step 3: Order Execution
Once the order matches the prevailing price, the order gets executed electronically. The trader receives notifications on their trading terminal, phone, and registered email about successful trade execution.
Step 4: Generation of Contract Note
A contract note is generated between 12-24 hours after the successful execution of the trade. It contains all the details about the transaction, like quantity bought or sold, transaction value, time of execution, and total amount debited from the trader’s account to execute the trade, including brokerage, security transaction tax and state tax. A contract note is a vital legal document to help settle dispute claims between brokers and investors.
Step 5: Settlement Process
Earlier the trades were settled as per the T+2 cycle, where the shares are credited to the buyer’s account after the second working day of trade execution. It is similar to the seller’s paying out. However, with effect from January 27, 2023 T+1 settlement cycle is in place.
Stock trading can build wealth over a long horizon if done methodically. First, however, you need to learn the fundamentals and complex workings of the market and use them to achieve your investment objective.
Frequently Asked Questions (FAQs)
Q1. What are some high-risk trading strategies?
Ans. Experienced traders with a high-risk appetite generally opt for margin trading, intraday trading and short selling.
Q2. Can I trade when the market is closed?
Ans. Unfortunately, you cannot trade after the market is closed, but you can put after-market orders on the broker’s terminal.
Q3. Is it possible to hold more than one Demat account?
Ans. Yes, it is possible to have multiple Demat accounts.
Q4. Can a Demat account have joint holders?
Ans. Yes, a single Demat account can have multiple holders, including one primary holder and two secondary holders.