In this blog I will tell you about all the types of trading styles which you can use to invest in the stock market. It is very important for you to choose a trading style before you invest in share market that suits your personality, preferences, and how your mind works i.e. your mindset.
In this blog we will learn the following:
- Intraday trading
- Delivery trading
- Swing trading
- Positional trading
- Futures & Options trading
Intraday is buying and selling shares within the same day. The main objective of the trader here is to take advantage of the stock market movements and make profits. Hence, the amount of profit and loss depends on the extent of fluctuations in the price of shares that the trader buys.
It involves taking additional leverage to generate higher returns. Addition Leverage means you can buy more shares with less amount. For example, you have Rs5000 to trade and you plan to do intraday trading of SBI shares. You got 5X leverage on it from your stockbroker. Then you can buy SBI shares worth Rs.25,000 for intraday. This is also called margin-based trading.
Stockbroker gives different leverage on different stocks based on the risk factor. You can check how much leverage does your stockbroker gives on a particular stock on Google.
Check the leverage given by Zerodha: https://zerodha.com/margin-calculator/Equity/
It suits people who are least bothered about the fundamentals of a company and other things that are considered necessary to be a successful investor in the long run. To them it’s all about technical analysis of stock means timing entry and exit properly i.e. buying and selling shares at the right time.
Also, intraday is for people who can dedicate a good amount of time tracking the movement of stocks regularly.
In intraday you need to sell your shares before the closing of the stock market. If you did not do so they are squared off means sold by your stockbroker at the market value of the share at the closing time of share market, and they charge a small amount for doing so.
It is the most popular type of trading in the modern market. In this technique there is no predefined time limit as such when you have to sell your shares. You can hold them as long as you want.
There are many benefits involved in the delivery. These include dividends, stock split, etc which you will not get in intraday. If you want to know more about the dividend, stock split, you can read my blog. I have explained all the terms in it which you will come across while investing in the share market.
But there are some disadvantages too, here brokerage rate is higher than intraday. Also, you have to make full payment to buy stocks in delivery whereas in intraday you can get more shares for the same amount of investment.
Both the forms of trading: intraday and delivery have their own pros and cons. I have stated below some of the differences between intraday and delivery.
|1.||In delivery you get no leverage, you have to buy shares by paying the full amount of each share.||In intraday you get good leverage from your stock broker.|
|2.||The brokerage fee is higher than intraday.||Brokerage fee is lower than delivery.|
|3.||In delivery, you get benefits like dividends, bonuses, etc.||In intraday you do not get such benefits.|
|4.||It is safer than intraday.||It is more risky than delivery.|
|5.||Here, traders did not have to track minute to minute of the market.||Here, trader has to track minute to minute of market.|
It is a style in which a trader tries to gain profits by keeping shares for a period of a few days to several weeks.
In this technique, traders use technical analysis to look for trade opportunities and analyze price trends and patterns. In addition they also use fundamental analysis.
If you want to learn about fundamental analysis, you can read my blog on fundamental analysis.
The goal of swing trading is to capture chunk of an expected price move of a stock.
The leverage used by the swing traders is lesser than intraday.
Swing traders work well for part-time traders who can do trading along with their work, while intraday require traders to stick to their computers and watch minute to minute change.
It is a type of style in which a trader ignores the minor fluctuations and the news of the day unless it impacts long term view of their position that the swing traders are fully focussed on.
Here timing the market is not the top priority. They are usually looking for the stock to gain more than 20% in the near future.
It involves less leverage than swing trading.
Here traders use technical analysis, fundamental analysis, or a combination of both to make trade decisions.
There is no much requirement of time in this technique, and that’s its biggest advantage for a busy person. Once the trade has been initiated then it’s just a matter of waiting for the desired outcome.
Futures and Options Trading
Futures and options is a derivative. Now, you may be wondering, what is a derivative?
So, a derivative is a financial instrument that derives its value from an underlying asset. This is its theoretical definition and I am sure you must have understood nothing from it.
So, let me break the definition into parts:
The firm term is financial instruments. Shares, bonds are all financial instruments. Like you can invest in shares, bonds you can also invest in derivatives as it is a financial instrument.
Second part: derives its value from underlying asset means if it is a currency derivative, then the US dollar derivative will only increase if the US currency price increase which is an underlying asset.
There are four types of derivatives: forward, futures, options, and swaps. But, as per the stock market is concerned, forward and swaps do not form a part of trading. You can only trade in futures and options which we would be talking about now.
I will explain you futures and options with an example of a farmer, whose crop will be ready after 1 month.
Today, the market price of that crop is Rs30/kg, he wishes he gets Rs30/kg for his crops because he thinks that the price will be less after 1month for that crop. So, he searches a dealer who is ready to make a contract with him who will purchase that crop for him after 1month for Rs30/kg even if the price decreases or increases.
Here the dealer makes the deal by thinking that the price will increase whereas the farmer thinks that the price will decrease, but in the future i.e. after 1month only one will be correct and will make a profit while the other will make losses.
This type of contract is called a forward contract. If this contract is done through the share market, it is called a futures contract.
Now I will come to the options. It is like insurance. Like in insurance you submit some premium every year for insurance like car insurance and get a safety and they will give the money if anything happens to your car.
Similarly here, let’s take only the previous example of the farmer. The farmer can take an option by paying a premium of Rs2 or something per kg that if the price goes up, then that money will be paid by that option company. For example if the price goes up to Rs40/kg and farmer had made a contract of Rs30/kg then that extra Rs10/kg will be paid by the option company. The farmer had to only pay that Rs2/kg premium.
But now a question can come into your mind that why will the option seller (company) will take that risk? As the option seller has to give the amount even if the price is raised to Rs.100/kg.
This is because it is like insurance. Have you ever heard of an insurance company making losses? They have big computers, professionals who calculate the premium in such a way that they will give options to many, and only very few will claim, ultimately giving them profits.
The more chances are the buyer will lose the premium amount and the option seller will make profits just like the insurance company.
If this type of trading of futures and options takes place on share market, it is called Futures and Options Trading.
In futures and options you can get high leverage from your stock broker.
In my point of view, investing in futures and options is not worth it because it is riskier and one only gains profit at the same amount of loss of the other. Before investing in it you must have a very good knowledge of the market. Warren Buffet calls futures and options as “weapons of mass destruction”.
I have explained you the concept behind futures and options trading, I don’t trade in futures and options so I don’t know more about it. You can watch the below video for full knowledge if you want to trade in futures and options.
Lets sumarise What we learnt from this blog.
We learnt about Intraday: Buying and selling shares on the same day. Delivery: There is no specific time when you have to sell your shares.
We also learn about Swing, Positional, Futures and Options trading.
After reading this blog, I feel you must have decided the style in which you will trade. You can even trade-in two styles as I do.
I allocate 70% of my portfolio for long term trades and 30% for Intraday trading. For example If I have Rs.10,000 to invest in the share market, I will allocate Rs.7,000 for long term trades and Rs.3,000 for short term trades mainly Intraday.
To sum up, after deciding a trading style in which you want to trade in the share market, you must know about the types of orders in the share market. So, for it, you can read my blog on order types in the share market.
Ans. Yes, it can be profitable if you have good technical analysis skills. However, there are some instances when your analysis can fail and you can make losses. Even pro and professionals sometimes make losses in it. It is much more risky than delivery. You should do Intraday only if you have a high risk-taking appetite.
Ans. I will not say that it is the best. According to me, it is better than intraday as you don’t have to stick to your screen and track every moment of the market. But in my point of view doing long term investing by fundamentally analyzing a stock is best.
Ans. Yes, it can be profitable only if you have great knowledge about the market and depend on how well you manage risk. But trading in futures is very risky because one makes profits only at the same amount of loss of the other.
I am a student currently pursuing B-tech in electrical engineering from Delhi Technological university.