Stock Advice
Stock trading is buying and selling shares of publicly listed companies. The intention remains to make more selling than what you spent buying those shares.
Mechanically, it is, and hence sounds straightforward. Other things that sound similarly straightforward are -
- You decide what you want to trade.
- You decide whether you expect its price to rise or fall.
- You decide when to place an order through your broker to get executed.
- You decide after how long you want to close the position.
Everything that happens between those points is what we call trading. Always remember that buying a stock doesn’t guarantee a hike in its price. Neither does selling lower it.
How to buy Stocks?
You buy stocks/shares directly through an online broker added to your algo trading platform. You immediately become a shareholder in the company.
You may also get into an agreement tied to a stock's future price with another market participant. This is a derivative. It largely depends on the market and the instrument, though. Trading a derivative whose value is linked to a share’s price doesn’t require owning the underlying stock.
Didn’t get it yet? Hang on, we’ll cover those in detail soon.
Stocks of the Tradable Types
Stocks are of many kinds. Companies differ by size, industry, growth prospects, valuation, dividend policy, and stage of development. The differences also affect how actively their shares get traded. That determines how their prices behave.
Some broad categories are:
- Blue-chip stocks: Shares of large, established companies. These have substantial market capitalisation and usually strong liquidity.
- Growth stocks: Companies whose earnings or revenue are expected to grow faster than the broader market. Heavy reinvestment is a reason behind this.
- Value stocks: Shares that appear relatively inexpensive compared to their earnings, book value, and cash flow. Could be other indicators of fundamental value.
- Dividend stocks: Companies that regularly distribute part of their profits to shareholders as dividends.
- Small-cap and speculative stocks: Shares of smaller companies that may offer substantial growth potential but can also carry greater volatility and liquidity risk.
- IPO stocks: Shares offered to the public when a private company lists on a stock exchange for the first time.
How to buy Stocks?
You buy stocks/shares directly through an online broker added to your algo trading platform. You immediately become a shareholder in the company.
You may also get into an agreement tied to a stock's future price with another market participant. This is a derivative. It largely depends on the market and the instrument, though. Trading a derivative whose value is linked to a share’s price doesn’t require owning the underlying stock.
Didn’t get it yet? Hang on, we’ll cover those in detail soon.
Stocks of the Tradable Types
Stocks are of many kinds. Companies differ by size, industry, growth prospects, valuation, dividend policy, and stage of development. The differences also affect how actively their shares get traded. That determines how their prices behave.
Some broad categories are:
- Blue-chip stocks: Shares of large, established companies. These have substantial market capitalisation and usually strong liquidity.
- Growth stocks: Companies whose earnings or revenue are expected to grow faster than the broader market. Heavy reinvestment is a reason behind this.
- Value stocks: Shares that appear relatively inexpensive compared to their earnings, book value, and cash flow. Could be other indicators of fundamental value.
- Dividend stocks: Companies that regularly distribute part of their profits to shareholders as dividends.
- Small-cap and speculative stocks: Shares of smaller companies that may offer substantial growth potential but can also carry greater volatility and liquidity risk.
- IPO stocks: Shares offered to the public when a private company lists on a stock exchange for the first time.
These categories overlap at times. A growth stock can be a blue-chip or dividend-bearing stock considered a value stock. Still, the labels are useful for understanding the market before you start creating trading strategies.
Stock Trading - The Working Principle
That very old, basic principle of: Buy lower. Sell higher. - says nothing and everything. Those are the two sides of the trade.
Expecting a price to fall can result in taking a short position where you aim to sell when the price is still high, so that you buy back later for less. Either way, a trader takes a view on price that comes from company fundamentals, technical analysis, market sentiment, economic data, or a well-defined trading strategy.
Here’s the process breakdown.
Buy & Sell positions.
Buy position: You expect the stock price to rise.
Sell/Short position: Expectation is that the price will fall so you can buy back at a lower price.
The precise mechanics of short selling depend on the market, security, and regulations governing the trade. The important point is simple.
You are taking a position based on a view of where the price may go next.
Market sentiment and sector rotation
Stock prices do not move in isolation. Investors and traders constantly reassess companies, industries,s and the broader economy. When expectations change, money can move from one sector to another.
Financial stocks may respond to changes in interest rates, credit conditions and economic expectations.
Energy stocks can respond to movements in oil and other commodity prices.
Technology stocks may react strongly to changes in growth expectations, earnings and valuations.
This movement of capital between sectors is often referred to as sector rotation.
Other reasons that make market sentiment change are
1. Major economic announcements, geopolitical events, elections, policy decisions, or unexpected corporate results. Traders determine the prices to a great extent in such cases. So the chart showing movements could be due to these reasons with long-lasting effects.
2. Liquidity of a stock refers to how easily you can enter or exit a position without affecting the price significantly, while volatility describes how much and how quickly a stock price moves. These are usually highly traded stocks with more buyers and sellers available. It makes execution easier and reduces the likelihood of large price differences between expected and actual execution.
For less liquid stocks, the spread (buy/sell price difference) may be wider. Or, orders may take longer to fill. Or, a large order may move the price significantly. But high volatility also creates more trading opportunities and larger losses.
Considering both liquidity and volatility is important when designing a strategy.
3. Trading fees determine if a profitable-looking trade is indeed a profitable trade. Attached costs to buying and selling are brokerage, exchange-related charges, taxes, and regulatory charges, depending on the instrument, broker, and the market. Thus, capturing a tiny price movement might make you spend from your own pocket even if you made a profit. Always make them a part of the strategy.
4. Risk management is creating a trading strategy that marks the correct points for your entry and exit. It determines how much you are prepared to lose. You may either use a stop-loss to automatically close a position if the price reaches a predefined point, or it could be a take-profit order.
5. Position sizing controls how much capital is exposed to any one trade, while diversification reduces dependence on a single company or sector. This way, market risk is reduced, not removed. A few losing trades, that way, won’t destroy the capital needed for the next one.
When do you trade?
Stock exchanges have fixed working hours- a trading schedule. Apart from daily opening and closing times, you can’t trade on national holidays and weekends.
For an Indian trader, the NSE and BSE are the most relevant equity exchanges. Their regular equity-market session is generally 9:15 AM to 3:30 PM IST, Monday to Friday, subject to exchange holidays and special sessions.
If you are using an online platform for trading, the platform may display global markets or instruments outside their regular local-equity trading sessions. That does not mean every market is open all the time. It’s therefore always advised to check the trading hours of the specific instrument intended for trade.
Stock Trading Risks and Benefits
Stock trading offers the possibility of making money from price movements as well as the possibility of losing money. Trade tactfully; trade with the best online trading platforms to make the best out of the situations.
