Equity trading used to be very intimidating for investors, with many having fear of the ups and downs of the market. But times have changed. Now, people are better informed and know how to manage risks. Well, this change has made Equity trading a more popular option. The change to invest in equity has become appealing, as today’s investors have access to more information and tools to make smarter choices. Whether you’re considering equity investment for long-term growth or short-term profits, understanding what interests you about the equity market can better guide your decisions. This guide will walk you through the basics of equity trading and help you understand this market better.
What is Equity Trading?
Equity trading involves buying and selling shares in the primary or secondary market through a stock exchange like the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) or over-the-counter transactions.Â
There are various approaches to equity trading. Some traders close their positions within a single trading day, known as intraday equity trading. Others prefer to capitalise on price movements over a longer period, spanning days, weeks, or even months—this is called swing equity trading. Â
To participate in equity trading, individuals must have a trading and demat account. While the costs of opening such an account may differ, the process is generally simple.
Investment Strategies for Equity Trading
Investors have a variety of strategies to consider when engaging in equity trading. Here are some of the most popular approaches:
Buy and Hold
This strategy involves purchasing stocks with the intention of keeping them for the long term, regardless of short-term market fluctuations. It operates on the principle that, over time, stock markets generally trend upward, allowing quality stocks to deliver substantial returns potentially. This can also be called delivery trading.
Value Investing
This approach focusses on finding stocks that are undervalued compared to their intrinsic worth. Value investors search for companies with strong fundamentals that the market may have overlooked, believing these stocks have significant growth potential.
Growth InvestingÂ
Growth investors target companies witnessing rapid earnings or revenue increases. They are often prepared to pay a higher price for stocks with promising growth trajectories, expecting that the company’s future performance will justify its current valuation.
Dividend InvestingÂ
This strategy is all about prioritising stocks that provide consistent dividend payouts. Investors who follow this approach look for companies with a solid track record of paying dividends and generating robust cash flows, aiming to create a reliable income stream from their investments.
Technical AnalysisÂ
Technical traders delve into historical price and volume data to spot patterns and trends in stock movements. They leverage tools like charts, moving averages, and various technical indicators to make informed buy or sell decisions based on market momentum and trends.Â
How Does Equity Trading Function?
Open a Broking AccountÂ
Start by setting up a broking account as your gateway to buying and selling stocks. Choose a broking that aligns with your needs, considering factors like service offerings and fees. You can also open free demat account online with HDFC Sky.
Fund Your Account
After opening the account, deposit funds to begin trading. Ensure you transfer enough capital to support your trading activities.
Search for StocksÂ
Use your broking platform to explore potential stocks. Research and analyse companies before deciding which stocks to trade.
Place OrdersÂ
Once you’ve chosen your stocks, place buy or sell orders. A market order ensures immediate execution, whereas a limit order allows you to set a specific price for buying or selling.
Ownership of SharesÂ
Purchasing shares means becoming a part-owner of the company. This gives you a stake in the company’s earnings and assets.
Monitor Your InvestmentsÂ
Monitor how your chosen stocks perform over time. A thriving company can increase the value of your shares.
Sell Your SharesÂ
You can sell your shares when the market price is right—selling more than your purchase price results in a capital gain.
Example of Equity Trading
Imagine you have₹10,000 and decide to invest in the stock of Tata Steel, which is currently trading at₹200 per share. You open a broking account, fund it with your ₹10,000, and decide to buy 50 shares (because ₹200 per share × 50 shares = ₹10,000).
- Buying Shares: You place a buy order for 50 shares at₹200 each, which means you’ve invested₹10,000 in Tata Steel.
- Holding Period: After a few months, Tata Steel performs well, and the stock price rises to ₹250 per share.
- Selling Shares: You decide to sell your 50 shares at this higher price. So, ₹250 per share × 50 shares = ₹12,500.
- Calculating Profit: Your initial investment was ₹10,000, and you sold for ₹12,500. This gives you a profit of ₹2,500 (₹12,500 – ₹10,000).
In this example, by investing ₹10,000 in Tata Steel and selling when the stock price increased, you earned a ₹2,500 capital gain. However, if the stock price had decreased, you might have incurred a loss instead.Â
Benefits of Equity Trading
Equity trading can be a smart way for you to grow your savings, protect your money from inflation, and increase your income. With inflation reducing the value of your money, just holding onto it isn’t enough—you need to invest. The equity market can be one of the best places to do this.Â
One of the biggest advantages of the equity market can be its ability to provide good returns. You also benefit from liquidity, meaning you can buy and sell shares easily since there’s a lot of trading happening every day.Â
If you’re investing for the long term, dividends can be a nice source of income. When you own shares in a company, you often receive dividends, which are payments made to shareholders. Plus, owning shares can give you a say in how the company is run because of your voting rights.Â
The equity market can also be regulated, ensuring transparency. Public information about stocks is available, which gives investors peace of mind.
For companies, the equity market can be an important way to raise funds. A company can go public through an initial public offering (IPO) when it is stable. This means it sells part of itself to the public to raise money. The starting price of the shares can be set during the IPO. If many people want to buy, the share price can go up, increasing the company’s value. However, if interest is low, the share price may drop, which can hurt the company’s worth. Successful companies can also issue more shares and distribute dividends to their shareholders, but they don’t have to.
Conclusion
Overall, equity trading can be a great way to grow your wealth over time. By learning how the stock market works, making smart choices, and avoiding common mistakes, you can increase your chances of success.. Be patient, learn continuously, and start small. With persistence, you can become a skilled trader and enjoy the rewards of investing in equity.
Open a free Demat account online with HDFC Sky, one of the best trading app in India! Experience seamless equity investment as you effortlessly invest in stocks from various companies and other financial instruments like mutual funds and ETFs. Start your trading journey today!
Frequently Asked Questions (FAQs)
Is equity trading profitable?
Equity trading can be profitable if you buy shares at a low price and sell them at a higher price. However, it also comes with risks. The stock market can be unpredictable, and prices can go down as well as up. Success often depends on research, market knowledge, and timing.
What is equity in the stock market?
Equity in the stock market means owning shares in a company. When you buy a company’s shares, you become a part-owner, or shareholder, of that company. This ownership entitles you to a portion of the company’s profits and assets.
Do stocks come under equity?
Yes, stocks are a type of equity. When you buy stocks, you’re purchasing equity in a company. This means you own a part of the company and can benefit from its growth and profits.