Do you know what is trading?
Yes! what is Trading? most of us heard this but they do not know what trading actually is. Trading means participation in the financial markets in comparison to investing, which works on a buy-and-hold strategy. The success of trading is dependent on the ability of a trader to be profitable over a period of time.
In other words, Trade is the activity of buying, selling, or exchanging goods or services between people, firms, or countries. … When people, firms, or countries trade, they buy, sell, or exchange goods or services between themselves.
A trader is a person who buys and sells financial instruments such as stocks, bonds, commodities, derivatives, and mutual funds in the capacity of agent, hedger, arbitrageur, or speculator.
The principles of trading
What is Trading? The term “trading” simply means “exchanging one item for another”. We usually understand this to be the exchanging of goods for money or in other words, simply buying something.
When we talk about trading in the financial markets, it is the same principle. Think about someone who trades shares. What they are actually doing is buying shares (or a small part) of a company. If the value of those shares increases, then they make money by selling them again at a higher price. This is trading. You buy something for one price and sell it again for another — hopefully at a higher price, thus making a profit and vice versa.
5 Different kinds of Trade
Internal Trade also known as Domestic Trade is the buying and selling of goods and services within the confines of the international boundaries of a nation. So while import and export are important for the economy of a nation, most of its GDP contribution comes from internal trade.
When buying and selling of goods take place across the national boundaries of different countries it is called External trade. It is also known as Foreign trade or International trade.
Export trade is a sub-division of international trade where goods produced in one country are transported to another country for sale or trade and as a crucial element of a country’s economy, exports stimulate economic growth.
The import trade refers to goods and services purchased into one nation from another. The word ‘import’ originates from the word ‘port’ considering the fact that the products are frequently transported via ship to foreign countries.
Entrepot trade refers to the practice of re-exporting goods with or without processing or re-packaging them again. This type of trade occurs at duty-free ports, where these goods do not have additional import or export duties, or taxes, placed upon them.
What are stock market
The stock market simlpy refers to public markets where people buying, and selling stocks that trade on a stock exchange or over-the-counter. Stocks is also known as equities. In Other words, stock market is a place where investors can buy and sell ownership of such investible assets. An efficiently functioning stock market is considered critical to economic development, as it gives companies the ability to quickly access capital from the public.
Purpose of stock market
The primary purpose of a stock market is to regulate the exchange of stocks, as well as other financial assets. Such regulation ensures a fair environment for not only investors, but also the corporations whose stocks are traded in the market.
The secondary purpose the stock market serves is to give investors – those who purchase stocks – the opportunity to share in the profits of publicly-traded companies. Investors can profit from stock buying in one of two ways. Some stocks pay regular dividends (a given amount of money per share of stock someone owns). The other way investors can profit from buying stocks is by selling their stock for a profit if the stock price increases from their purchase price. For example, if an investor buys shares of a company’s stock at $10 a share and the price of the stock subsequently rises to $15 a share, the investor can then realize a 50% profit on their investment by selling their shares.
How do you get money from stocks?
Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.
3 main Types of Stock market
- Common Stocks
- Preferred Stocks
- Hybrid Stocks
What is Share market?
Share market is where buying and selling of share happens. Share represents a unit of ownership of the company from where you bought it. For example, you bought 10 shares of Rs. 200 each of ABC company, then you become a shareholder of ABC. This allows you to sell ABC share anytime you want. Investing in shares allows you to fulfill your dreams like higher education, buying a car, building a home, etc. If you start investing at a young age and stay invested for a long time, the rate of return will be high. You can plan your investment strategy based on the time you need money.
I think most of you have heard about Bull and Bear but did not bother to learn what it is. Bull market is one where the prices of stocks keep rising and the bear market is where the prices keep falling. Where all these buying and selling happens? NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). These are the two major stock exchanges in India and are regulated by SEBI (Securities and Exchange Board of India).
What is Margin in Trading
Margin trading is a form of borrowing that lets you leverage securities you already own to purchase additional securities protect your account from overdraft or access a convenient line of credit.
Margin trading is not designed for any specific type of customer. It may be right for any investor looking for additional leverage in their investment.
Here is an example of how it works. Assume you want to buy 1000 shares of QRS stock at $10 per share but only have $5000 in vegetable cash available. With a margin account, you can use your $5000 in cash and borrow the other $5000 on margin to make your purchase.
Without margin with what’s called a cash account you would need the full ten thousand dollars in cash to make this stock purchase.
Now, let’s see a how margin loan could impact your investment return. Assume the QRS stock rises in value from $10000 to $11000 and you sell it. You would payback the $5000 margin loan and realize a profit of $1000, that’s a 20% return on your $5000 investment.
Without a margin loan you would have invested $10,000 in cash and realize only a 10% return.
What is Leverage in Trading
Leverage is a powerful tool when the price of the security moves in your favor. It is also important to recognize the downside of the stock price falls.
Assume the market value of the QRS stock you purchased with margin for $10,000 falls to $9000. Your equity, which is the value of your position minus the loan balance of $5000 would fall to $4000. That’s a 20% loss from a 10 percent decrease in market value.
Just like any loan, you will also incur interest charges that begin accruing on the date your trade settles.
The rate you pay depends on your outstanding margin balance known as the margin debit balance.
The rate is typically calculated using a tiered schedule. The higher your debit balance the lower the rate you are charged.
You should also know that margins loans have no set repayment schedule, as long as you maintain the required the level of equity in your account.
What is Equity investment
Equity is simply what you own minus what you owe. For example, suppose you own a house, a car and you have savings in your bank account totaling $5000 also suppose you owe the bank a total of $4000 in mortgage credit cards and loans.
This means your equity is $5000 minus $4000 which is equal to $1000. Now, let’s look at it from a business’s point of view. In simple terms what business owns is known as Assets and what a business owes is know as Liabilities. Therefore, Equity is equal to Assets minus Liabilities.
Equity can be divided into two parts.
- Shared capitals
- Retained earnings
Imagine a business needs to raise $5000 to expand. There are number of ways the business can do this. one way is the business can divide the $5000 into 1000 portions of $50 each to make available for investors to purchase, these portions are known as Shares.
Interested investors purchase the 1000 share and the company raises $5000. What do these investors get? They become part own of the business and they would expect a return on their investment if the business made profits. In other words, they will become shareholders and they can expect to receive dividends. Therefore, this $5000 is known as Share capitals.
It is that portion of the business in which profit that will not be paid out to shareholders as dividends but will be kept in the business to operate pay debt or reinvest in the business.
Trading is often viewed as a high barrier, but as long as you have patience, you can trade for a living.
I hope this blog helps you understand what is trading.