Equity trading has become a popular investment method, offering a pathway to building financial security over time. By purchasing shares in publicly listed companies, investors can gain from the company’s growth and earnings. Nevertheless, trading stocks carries certain risks, making it crucial for investors to grasp the fundamentals of the equity market and establish clear investment objectives.
Just like any other marketplace that connects buyers and sellers, the stock market serves as the venue for equity trading. Think of it as the marketplace for all equity transactions. But what is equity trading? Let’s take a closer look at this concept in this guide.
What is Equity Trading?
Equity trading involves buying and selling shares of companies that are listed on stock exchanges. Through this activity, investors can take part in and possibly profit from changes in the equity market. With equity investment, you can earn profits that can beat inflation. There are two most prominent types of stock markets in India: BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). All the equity stocks are traded on these stock exchanges.
What is Equity in the Stock Market With an Example?
Stocks and shares, commonly known as ‘equities’ or ‘securities,’ represent a portion of ownership in a company. When you buy a share of a company, you essentially own a small part of that company. The stock market is where these equities are traded between buyers and sellers. Stock markets can be physical or completely digital. For example, the Bombay Stock Exchange (BSE) is physically located on Dalal Street in Mumbai, where trades used to happen in person. Over time, trading has evolved from telephone calls to mostly electronic transactions through computer systems.
Example: Understanding Equity with Reliance Industries
Let’s take the example of Reliance Industries, a well-known Indian company. Suppose you buy 100 shares of Reliance Industries. This means you now own a small percentage of the company. If Reliance Industries grows and its share prices rise, the value of your shares increases, allowing you to potentially sell them at a higher price than you bought them for, making a profit. Additionally, as a shareholder, you may receive dividends—payments made by the company from its profits.
When you place an order to buy or sell shares of Reliance Industries, you do so through the stock market, such as the BSE or NSE (National Stock Exchange). Buyers quote the price they are willing to pay for a share, and sellers quote the price they want to sell for. In traditional markets, brokers would help match these buyers and sellers, while in modern, digital markets, computer systems handle these transactions automatically.
Types of Equity Trading
- Day Trading: Day traders try to make money by placing transactions throughout a single trading day in an effort to take advantage of brief price changes. They usually close all of their bets before the market closes, taking advantage of intraday price swings.
- Swing Trading: Swing traders take advantage of medium-term market movements by holding positions for a few days or weeks at a time. They may employ technical analysis to identify possible entry and exit points in an effort to capitalise on bigger price movements.
- Algorithmic Trading: Algorithmic trading uses computer algorithms to carry out trades automatically according to preset standards. To make quick trading judgements, it makes use of speed, precision, and the capacity to handle large volumes of data.
- High-frequency Trading: Traders take advantage of tiny price differences by executing a high number of deals in a matter of milliseconds using sophisticated equipment and algorithms.
How Does Equity Trading Function?
Equity trading is the process of buying and selling shares of companies through a stock market. Here’s how it works in simple terms:
- Buying Shares: When you buy shares of a company, you are purchasing a small part of that company. For example, if you buy shares of Company X, you become a partial owner of that company.
- Stock Markets: Stock markets like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) act like marketplaces. This is where buyers and sellers come together to trade in equity. You don’t need to visit a physical place—most trading happens online through demat app or websites.
- Setting Prices: When you want to buy a share, you set a price you’re willing to pay, and when you want to sell, you set a price you want to receive. These prices are matched by the stock market’s system. If the buyer’s and seller’s price match, a trade happens automatically.
- Making Profits or Losses: The goal is to buy shares at a lower price and sell them at a higher price to make a profit. For example, if you buy shares of Company X for ₹100 each and later sell them for ₹120 each, you make a profit of ₹20 per share. But if the price falls to ₹80, you would incur a loss if you sold at that point.
- Using a Broker: Most people don’t trade directly in the stock market; they use a broker. A broker is like a middleman—think of them as your connection to the stock market. They help place your buy and sell orders in exchange for a small fee.
Conclusion
Overall, equity trading can be a great way to grow your money, but it comes with risks. You need to understand and manage risks carefully, before investing in equity. Without a solid strategy and knowledge, you can face significant losses. Being informed and cautious can make all the difference between making profits and losing money in the equity market.
Open 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)
What are the problems with trading on equity?
The company might face financial trouble or even go bankrupt if it can’t generate enough returns. High Debt: If a company takes on too much debt, its leverage ratio increases, making it more vulnerable to market changes and economic downturns.
What is the importance of equity trading?
Equity trading plays an essential role in the economy by providing a platform for companies to raise funds for growth and expansion. It makes it possible for people to invest in companies and maybe profit from their success. Additionally, equity trading encourages market liquidity, which makes it possible for investors to buy and sell stocks profitably.
