The stock markets have long offered individuals and institutions the opportunity to invest in promising companies and grow their wealth. Equity trading, one of the primary ways to engage with the stock market, involves buying and selling shares of companies listed on stock exchanges. Based on your trading preferences and investment goals, you can try various types of equity trading, including intraday, scalping, swing, position, and momentum trading.
Understanding different types of equity trading is crucial for investors. In this blog, you will explore these types with examples and learn how they work, equipping you with the knowledge you need to make informed decisions. Keep reading.
Types of Equity Trading
The stock markets provide an expansive arena for traders, allowing them to choose a trading type based on their personal preferences and knowledge. However, what works for one person may not work for another. Thankfully, with the advent of stock market apps and advanced trading tools, it’s easier for traders to tailor their approach and chalk out their own paths to success.
Below are the common types of equity trading one can engage in:
Delivery Trading
The most common type of equity trading, delivery trading, involves buying and holding shares for extended periods of up to several months or even years. The process entails transferring ownership of shares from the seller to the buyer. This traditional method of equity trading is ideal for investors who believe in a company’s long-term growth potential.Â
The key features of delivery trading include:
Ownership of Shares: Investors become shareholders and are entitled to dividends, voting rights, and other benefits.
No Leverage: Unlike intraday and margin trading (which we will discuss later in this blog), delivery trading requires full upfront payment of the stock price.
Low-risk: Since delivery trading involves long-term investment, short-term market volatility has less impact.
To start with delivery trading, you must open Demat account to securely hold your shares electronically. A Demat account is mandatory for all equity trading activities in India.
Intraday Trading
Also known as day trading, intraday trading involves buying and selling securities within the same trading day. The goal is to capitalise on short-term price movements and make a profit by the end of the day. Intraday traders typically need to close their active positions before the market closes. Since positions are not carried forward overnight, traders avoid the risks associated with after-hours market fluctuations.
The key features of intraday trading include:
High Liquidity: Intraday traders focus on highly liquid and volatile stocks to ensure quick execution of trades.
Technical Analysis: Traders rely heavily on charts, indicators, and patterns to predict price movements and identify potential profit opportunities.
Leverage and Margin: Many brokers offer margin trading for intraday transactions, allowing traders to amplify their positions.
Intraday trading requires prompt decision-making and a thorough understanding of the stock market. Beginners must start small and gain experience before diving into high-volume intraday trades.
Swing Trading
Swing trading is a medium-term strategy involving buying and holding stocks for a few days or weeks. It is more suitable for those who cannot dedicate full-time attention to the market. Here, traders try to exploit short—to medium-term price fluctuations. Unlike intraday trading, swing trading does not require daily monitoring of stock prices.
The key features of swing trading include:
Technical and Fundamental Analysis: Swing traders use a combination of technical charts and fundamental data to identify potential opportunities.
Lower Stress: Since trades are held for a few days or weeks, there is less pressure than in intraday trading.
Moderate Risk: While swing trading involves overnight risks, the larger timeframe allows traders to make informed decisions.Â
Swing trading requires patience and discipline, but it is an excellent option for those who want to balance delivery and intraday trading.
Margin Trading
Margin trading allows traders to borrow funds from their brokers and execute larger trades than their available capital would allow. This leveraged trading method can magnify both profits and losses, making it a double-edged sword.Â
The key features of margin trading include:
Increased Buying Power: Traders can take more significant positions with borrowed funds.
Interest Charges: Brokers charge interest on the borrowed amount, which adds to the cost of trading.
Risk Management: Effective risk management strategies are crucial to minimise potential losses.
Margin trading is commonly used in intraday and swing trading strategies. However, before engaging in margin trading, it’s essential to fully understand the risks and associated terms.
Momentum Trading
Momentum trading involves buying and selling securities based on the prevailing uptrend or downtrend. Traders need to identify stocks that are either breaking out of the resistance or support zones or may break out soon and take positions accordingly. In the case of an uptrend, the trader buys the stocks and waits until the trend reverses, and vice versa.Â
The key features of momentum trading include:
Technical Analysis: Momentum traders use technical analysis tools to identify stocks with upward or downward momentum.
Price Action: In momentum trading, the emphasis is on the current market momentum rather than underlying fundamental aspects.
Risk Management: Strategic risk management strategies are essential to ensure minimum losses in the case of abrupt trend reversals.
Momentum trading requires a certain level of expertise and time. Before taking the plunge, gaining appropriate knowledge and understanding the associated risks is crucial.
Positional Trading
Positional trading is a long-term strategy where traders hold their positions for weeks, months, or even years. The goal is to benefit from significant market trends rather than short-term fluctuations.
The key features of positional trading include:
Fundamental Analysis: Traders base their decisions on a company’s financial health, industry trends, and economic condition rather than short-term price fluctuations.
Patience Required: Positional traders must withstand market volatility and stay committed to their investment goals.
Diversification: Building a diversified portfolio is crucial to mitigate risks.
Positional trading blurs the line between trading and investing, as it often involves a mix of both approaches.
Conclusion
Equity trading offers diverse opportunities for different types of traders or investors. Whether you prefer the fast-paced world of intraday trading or the steady growth potential of delivery trading, you can choose a strategy to suit your financial goals and risk appetite. However, before diving, ensure you have a clear understanding of the market and associated risks.
You can start small and gradually increase your investment amounts as you gain knowledge and exposure. So, take the first step by opening a Demat account with HDFC SKY, and start building your wealth through the exciting journey of equity trading!