Stock trading is the process of buying and selling shares of companies to make a profit. It might sound complicated at first, but once you understand the basics, it becomes much easier to grasp. In this blog, we'll walk you through the essentials of stock trading, the different types of stocks, how the stock market works, and the benefits of trading stocks.
To understand stock trading thoroughly, first, you have to understand the basics of stocks and the stock market.
Stock
A stock, also referred to as equity, represents ownership in a corporation. Owning stock entitles the stockholder to a portion of the corporation's assets and income, proportional to the number of shares they possess. These units of stock are called "shares."
In other words, in order to raise money to run their businesses, corporations issue (sell) stock. Depending on the type of shares held, the shareholder who purchases stock also purchases a portion of the corporation's assets and profits. In essence, a shareholder now owns stock in the corporation issuing the stock.
Types of Stock
There are two main types of stocks:
Common Stock:
- This is the most common type of stock.
- Owning common stock gives you voting rights at the company's shareholder meetings.
- You can benefit from dividends (a share of the company’s profits) and the increase in stock price.
Example: You buy 100 shares of ABC Corporation's common stock at ₹100 per share. As a common stockholder, you get to vote on important company matters at the annual shareholder meeting. ABC Corporation announces a dividend of ₹10 per share, so you receive ₹1,000 in dividends. Additionally, if the stock price rises from ₹100 to ₹140 per share, your investment value increases from ₹10,000 to ₹14,000.
Preferred Stock:
Common stock is issued by all publicly traded firms, but only a few also issue preferred stock. The preferred stock offers its owners guaranteed dividends as well as the opportunity for price growth similar to that seen with common stock. The preferred stock dividend may be higher if a company's common stock pays dividends.
- Preferred stockholders usually don't have voting rights.
- They receive dividends before common stockholders.
- In the event of bankruptcy, preferred stockholders are paid before common stockholders.
Example: You purchase 50 shares of XYZ Corporation's preferred stock at ₹200 per share. Unlike common stockholders, you don’t have voting rights. However, XYZ Corporation promises a fixed dividend of ₹20 per share, so you receive ₹1,000 in dividends before any dividends are paid to common stockholders. If XYZ Corporation faces financial trouble and goes bankrupt, you are more likely to get paid from the company's remaining assets than common stockholders.
What is Stock Market
The stock market is a collection of markets where stocks (shares of ownership in businesses) are bought and sold. In addition to generating and sustaining wealth for individual investors, the stock market assists businesses in raising capital to fund operations.
The two main stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Understanding Stock Trading
Stock trading is a type of investment that puts short-term profits ahead of long-term gains. Stock trading entails buying and selling company shares in an effort to make a profit from daily price fluctuations. The short-term price changes of these equities are actively monitored by traders, who subsequently attempt to buy low and sell high.
Stock traders differ from traditional stock market investors in that they take a short-term perspective rather than a long-term one.
While buying and selling individual stocks can result in quick profits for those who time the market right, there is also a risk of suffering significant losses. Unlike the market as a whole, a single company's fortunes can rise faster but could tumble just as quickly.
If you do have the funds and are interested in learning how to trade, Swastika Investmart has made it easy for you to quickly trade stocks from your computer or Smartphone.
Benefits of Stock Trading
Many investors over the years, whether beginner or experienced, have made considerable profits by strategizing and investing in equities. The fact that some investors' success formulas didn't work at all, however, causes everyone to pause before investing in stocks or entering the stock market. There are greater chances of profiting from investments when an investor makes the right and proper judgments.
The stock market is, after all, extremely volatile. But compared to other investments, stock investing has a number of significant advantages.
Potential for High Returns:
- When compared to other investment options like bank FDs, investing in stocks has the potential to produce substantial returns in a short amount of time.
- Stock trading can provide substantial returns in a short period, especially if you invest in the right stocks.
Flexibility to Invest Small Amounts:
- You don't need a lot of money to start trading. You can buy small quantities of stocks based on your budget.
- Another significant benefit of investing directly in stocks is that investors can make their own purchasing decisions and are not required to make a certain monthly investment.
Hassle-free buying and selling process
- All investors can buy and sell stocks using a simple approach. Stock purchases can be made online, through a financial advisor, or through a broker.
- To open a demat account and begin trading, barely takes any time at all. An investor can quickly buy and sell stocks online without having to travel, and the proceeds are immediately credited to their bank account.
Continuous and Easy Transactions
- When an investor buys stock in a specific company, they are essentially acquiring a share in that business. As a result, buying stocks will provide investors with a sense of ownership.
- Having ownership entitles them to shareholder status and a significant voice in corporate decisions. Additionally, investors will have a voice in corporate choices.
Dividend Perks
A dividend is a payment made by a firm to its stockholders. In simpler terms, it is the yearly additional revenue that every company pays to investors.
- Owning stocks gives you a sense of ownership in the company.
- You can earn dividends, which is a portion of the company’s profits paid to shareholders.
Investment Profits
- The opportunity to increase one's income is one of the main advantages of stock market investing. The values of a specific stock may increase or decrease over time if the value of the stock market increases.
Liquidity:
- Stocks are highly liquid investments, meaning you can quickly buy and sell them.
Diversification:
- Stock trading allows you to diversify your investments across different sectors and companies, reducing risk.
How Does Stock Trading Work?
Stock trading works through exchanges. Here’s a simple process of how trading happens:
- Opening a Demat and Trading Account:some text
- To start trading, you need to open a demat (dematerialized) account and a trading account with a brokerage firm.
- Placing Orders:some text
- You can place buy or sell orders for stocks through your trading account.
- Order Execution:some text
- Your order is then matched with a seller or buyer on the stock exchange.
- Once matched, the transaction is executed.
Risks of Stock Trading
While stock trading can be profitable, it also carries risks:
- Market Volatility:some text
- Stock prices can fluctuate widely due to market conditions.
- Potential for Losses:some text
- There's always a risk of losing money, especially if the company performs poorly.
- Emotional Decision-Making:some text
- Traders may make impulsive decisions based on emotions, leading to losses.
Conclusion
Stock trading can be an excellent way to grow your wealth, but it's essential to understand the basics and the risks involved. By learning how the stock market works, the types of stocks available, and the benefits and risks, you can make smart decisions and potentially achieve your financial goals.
If you're interested in starting your stock trading journey, consider opening an account with a Swastika Investmart, which offers easy-to-use platforms for trading on both computers and smartphones. Happy trading!
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