Are you a beginner looking for a guide to equity trading? Are you confused by all the buzz around it? How does equity trading differ from stock, options, and intraday trading? What is the best risk management strategy for equity trading? How do you plan and execute a successful equity trading strategy?
We will try to cover everything a beginner needs to know about trading on equity in detail. Let us embark on your journey toward equity trading with our introductory article on everything you need to know about equity trading in India.
Before understanding equity trading, let us first decode the term.
What is Equity?
Equity denotes the value the company’s shareholders will receive if all its assets are liquidated and its debts are paid off. In a company’s balance sheet, equity is the share of the shareholders in the company. Equity ownership will give a shareholder the right to vote on matters related to the company.
Calculating Equity
Shareholders’ Equity=Total Assets−Total Liabilities
Now, let us jump quickly to today’s topic: Equity trading.
What is Equity Trading?
Equity trading is a popular investment method involving buying and selling stocks or shares of companies listed on the stock exchange. Through equity trading, Investors or funds can buy stocks of publicly traded companies, which will equip them to receive shares from the companies’ growth and profit.
Equity trading happens through an equity trading platform, where an investor has to open an account to commence trading on equity.
Benefits
Equity trading is a popular investment method that provides an opportunity to grow wealth over a long period. However, like any investment, it has its faults. Let’s first explore the benefits of equity trading in detail.
- Stock market investments perform better over a long period than any other traditional investment method. Investing in equity for a short period may not yield much profit or result in loss. So, the ideal holding period for equity shares should be three to five years. Equity trading is an ideal solution for individuals looking for a long-term investment. Equity trading courses and calls from SEBI-registered analysts will equip you with all the necessary skills to pursue successful equity trading.
- Equity is the best hedge against inflation during unexpected financial crises and periods of inflation. It gives the highest returns during these periods.
- Equity trading provides companies with capital to invest more in their businesses. It will eventually generate more employment and accelerate the country’s economic growth.
- A well-maintained equity market in the country will increase investors’ confidence in the investment, positively affecting the country’s economy.
- Investing in equity shares will diversify the portfolio of investors and thereby decrease the risk potential of their investments.
- Though equity trading is riskier than savings schemes and other traditional investments, the reward will be higher if you manage the risk analytically.
- Companies with a good track record regularly pay dividends on their equity share. This payment to the shareholders from the company’s earnings ensures a regular source of income.
How does Equity Trading work?
You know what this type of trading is and its benefits. Before entering into this, you should conduct detailed research and analysis to determine potential investment options. You can either seek advice from professionals or do it yourself. Now, let’s look at the step-by-step process for starting equity trading.
- First, you need to open a Demat account. A Demat account is a digital repository for holding securities in electronic form. It holds stocks or shares similar to a bank account’s cash. Your buying and selling actions from the stock market will credit or debit the demat account.
- Next, you should open a trading account. It acts as an interface between you and the stock market. When you order to buy or sell a security, transactions are executed through your trading account. Unlike a Demat account, which holds securities, a trading account holds cash and facilitates funds transfer for securities transactions. Then, you should activate the trading account you opened with your brokerage firm of choice.
- Many brokerage firms allow you to trade without using real money. Use demo accounts to understand the platform’s workings and build your own strategy.
- To start trading on equities, you need funds available in your trading account, which involves transferring money from your bank account to the trading account with the brokerage.
- The next step in the equity trading process is the placing of orders. When you place an order, the trading system checks whether the price matches what sellers offer. If it matches, equity trading occurs.
- After placing an order, your broker will execute it based on the specified order. Depending on market conditions and share availability, the order may be partially or filled.
- Once your order is executed, you will receive a confirmation from your broker, including all the trade details and their commissions.
Your trading strategy does not end with its execution. You should constantly monitor your positions and manage risk. You must also rebalance and exit positions following market conditions to align with your investment goals.
Finally, it is important to consider the tax implications of your equity trades. Depending on your tax regime, you may be subject to capital gain tax when you sell your equity shares in the market.
Equity and Stock Trading
Equity and stock trading are often used interchangeably, but there is a subtle difference between them. Equity trading is a broader term encompassing various equity instruments beyond stocks. On the other hand, stock trading includes only buying and selling shares of individual companies on the stock exchange.
Equity trading encompasses various types of securities representing ownership interests in a company, such as preferred stocks, exchange-traded funds, and equity options.
Equity trading can be used in various financial markets, including stock exchanges, over-the-counter (OTC) markets, and alternative trading systems (ATS). It covers trading in all types of equity instruments across different markets. Stock trading primarily involves buying and selling shares of publicly listed companies through stock exchanges.
Other Types of Equity Trading Beyond Stock Trading
Most beginners consider equity trading synonymous with stock trading. By now, you would have understood that equity trading is an umbrella term including stock trading. Now, let us look at other types of trading included in the equity trading category.
- Preferred Stock Trading
- Exchange Traded Funds Trading
- Equity Options Trading
- Rights Issues Trading
- Convertible Securities Trading
- Warrants Trading
- Right to Acquire Shares Trading
Equity Trading and Intraday Trading
As types of trading in the financial market, equity, and intraday trading differ in their objective and time horizon. Let us understand the difference between them through the table given below:
| Equity Trading | Intraday Trading |
| Longer Time Horizon | Shorter time horizon |
| The primary objective is to build wealth over time. | The main objective is to benefit from the short-term price movements in the market. |
| Investors usually use fundamental analysis. | Use technical analysis such as chart patterns and indicators. |
| It is less risky because of the longer time frame. | It is considered more speculative and involves higher levels of risk. |
| Require more capital compared to intraday trading. | Requires less capital. |
Equity Trading and Options Trading
Equity and options trading are different methods investors use to participate in the financial market. They differ significantly in their risk profiles, potential returns, and strategies.
In equity trading, investors buy and sell shares of individual companies or exchange-traded funds with the expectation that their value will increase over time. In contrast, Options trading involves buying and selling options contracts, which give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified timeframe.
In equity trading, investors own shares of the underlying company, while in options trading, investors hold contracts that give them the right to buy or sell shares at a predetermined price.
Options trading involves higher levels of risk and leverage than equity trading. Options contracts can expire worthless, and traders can lose their entire investment.
Options trading involves higher levels of risk and leverage than equity trading. Options contracts can expire worthless, and traders can lose their entire investment.
Best Equity Trading for Beginners
Are you a newbie in equity trading who still needs to understand better strategies and risk management methods? Equity trading is not out of your reach. Let’s see what equity trading options suit a beginner like you.
Mutual Funds
Mutual funds are the favorite choice for newbies and experts alike. Professional fund managers pool money from investors like you and invest it in various portfolios. Mutual funds are the best equity trading option for beginners looking for a lower-risk and diversified portfolio.
Exchange Traded Funds
Exchange-traded funds are traded on stock exchanges like individual stocks. They are designed to track the performance of a specific index, commodity, bond, or combination of assets. It is a simpler and risk-free equity trading.
Buy and Hold
Buy-and-hold is a long-term equity trading plan in which you buy stocks and hold them for a longer period, typically five years or more.
Robo Advisors
If you are a beginner who needs more time to plan your trading strategy, robo-advisors are the best way to do equity trading for you. They use algorithms to invest based on your investment goals.
Common Risk Factors of Equity Trading
Though equity trading is profitable, many traders end up losing the game. Let us understand the reasons why traders lose money in equity trading.
Market Risk: Events or trends, such as geopolitical events, economic conditions, and market sentiments, may impact the market.
Company or Industry-Specific Risk: Company-specific risks such as management issues, competitive pressures, and company performance also impact equity trading.
Psychological Bias: Emotional factors like fear, greed, and herd mentality can influence investment decisions and lead to suboptimal outcomes. Emotional biases can cause investors to buy or sell stocks at the wrong time, ignoring fundamental analysis and long-term investment objectives.
Lack of Education: Traders must educate themselves about the strategies and management techniques to manage their portfolios skillfully.
Not using stop loss in their orders: Not setting a price to exit from trading can cause huge losses in equity trading.
Suggested Read: Best Intraday Telegram Channels in India
FAQs About Equity Trading In India
Who is Eligible for Equity Trading?
Any individual who has reached the age of eighteen can open a demat and trading account using their verification document and start their equity trading seamlessly in India.
What is Cash Equity Trading?
Cash equity trading refers to the buying and selling of company shares (stocks) on stock exchanges for cash. In this type of trading, investors purchase shares using their funds, and ownership of the shares is transferred upon settlement, typically within a few days after the trade date.
What is the process of demat account closure of equity trading?
If a Demat account is associated with equity trading, closing the account includes a step-by-step process.
- Sell or transfer holdings in the Demat account.
- Settle the outstanding dues.
- Submit closure request
- Pay account closure charges if applicable.
- Verification and processing
- Confirmation and settlement
- Final Confirmation.
What is Equity Trading Volume?
Equity trading volume refers to the total number of stock shares traded within a specific period, typically measured over a day, week, month, or year. It represents the activity level or liquidity in the stock market and provides insights into investor sentiment, interest, and participation.
Where can I get trading calls to plan my strategy better and manage my trading?
You can join Gap Up’s Telegram channel or subscribe to telegram channels run by SEBI registered experts to receive trading calls in Hindi or English.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.
