A lot of first-time investors are moving to stock markets to use up the free time in lockdown and to earn some extra cash. And most of these investors are trying their hand at short term trading as a way to get fast returns. Clearly, stock markets have become more accessible for every investor. However, getting into trading without a sufficient understanding of the basics of trading can lead to losses in the portfolio. Hence, today, we are going to look at a few types of stock market trading and it’s suitability for various investor profiles.
Types of Stock Market Trading
Intraday Trading / Day Trading
Intraday trading or Day trading is simply buying and selling the shares on the same day. Usually, traders use this type of trading to take advantage of small price movements in shares that happen during the day. While this does sound very lucrative and easy way to make money, you need to be very mindful about the movements in the share price.
Intraday trading is not something that you can follow as a hobby. You will have to spend time to track the share price and to exit at the right time. So if you are a beginner and don’t have much experience in trading, it is ideal not to go with this option. Because during volatile markets, the share prices change by seconds and tracking this movement can be a challenge for new investors.
Swing trading is a short term trading style spread across various days/weeks to take advantage of short term gains. A lot of traders execute Swing Trading strategy with technical analysis of stocks.
The key to successfully execute a swing trading strategy is to identify a trend for a stock. If there is clarity in short term movement of the stock, you can benefit from using swing trading.
As your investment period is longer, the potential returns are also higher in this strategy. However, an unaccepted event or news can lead to losses.
Swing trading is suitable for investors who are comfortable with volatility and have the patience to hold on to a position until it plays out.
Positional trading is a strategy which includes holding on to a stock for a few days/months till it reached your target price. This strategy is executed with a mix of technical analysis and the fundamental aspects of the stocks. Technical analysis helps in identifying entry and exit points of the stock and the fundamental aspects help with understanding the potential upside/downside of the stock.
This strategy is useful for a new investor because even if the investment call goes wrong in the short term, it is possible to cover losses over long periods.
These are just some of the most frequently used trading strategies by short term investors. In addition to this, there are a few factors which you should keep in mind while trading for the first time:
- Stop loss for every trade is a must.
- Avoid margin trading in the early days. Margin trading can multiply your losses if the trade goes wrong.
- Do not invest all your capital in one go.
- Do not short sell until you get some experience of market volatility.
- Do not jump into derivatives at the start as they have very high risk associated with them.
Stock markets are a great way to make money but it also has extreme volatility. As a new investor, it is important to understand all the nuances of trading and get a view on risk as well as possible losses. This will set the right expectations from your trades.