Types of equity trading
However, before understanding the types of trading in equity, let’s first be clear on your investment principles -
- What is your purpose of investing in equity? Are you looking for steady returns (Dividend) or capital appreciation (Growth)?
- What is your investment horizon - are you in it for the short term or the long term?
- Are you planning to invest in a lump sum or through multiple investments over the year?
- What level of expertise do you have when it comes to equity trading? And how much time can you spare for investing?
Now that you have a better understanding of your investing perspective, let us understand the types of equity trading.
There are five major types of trading in equity -
- Scalping - Scalping is trading that involves buying and selling of equity within seconds or minutes. Also referred to as micro trading, scalping attempts to make its profits off small price changes. A scalper typically places hundreds of trades every day intending to cash in gains from minute price differences. Since this requires a lot of attention and skill, beginners should exercise caution while executing such trades. Scalping also requires the trader to be strict with their exit strategy as one substantial loss could overtake the many small wins obtained in a day.
- Day trading - Day trading, as the name suggests, is any buying and selling carried out within the same trading day. Unlike scalping, which occurs within seconds or minutes, day trading takes place until the market closes on the same day. Traders who trade in this capacity are often skilled investors who are well-educated in this field and have enough time to spare to monitor stock markets throughout the day. Day trading is usually carried out to capitalize on small price movements by using high amounts of leverage.
- Swing trading - Swing trading is based on the price fluctuations in the market. Though this is also a type of short-term trading, it's different from day trading as traders close trades within few days to several weeks. Experts view swing trading as the middle ground between day trading and long-term investing. Investors use technical analysis and execute swing trading to capture a significant portion of a potential price move.
- Position trading - Position trading is to hold a position open for a more extended period with the expectation that its value would appreciate or depriciate. This type of trading can be carried out for weeks to months, thus making it easier for traders who cannot frequently trade to get on board. Position trading is also referred to as "trend followers" because its core belief is that once a trend starts, it's likely to continue. Position trading is the exact opposite of day trading, as its goal is to profit from the move in the primary trend rather than minor price fluctuations.
- Long term trading – Long-term trading refers to positions held by investors for months or years. Long-term trading is complex and needs to consider the potential value of the underlying stock before holding a position. This trading on equities is also known as "buy-and-hold" trades, as against "buy-and-sell" trades. Investors undertake this type of trading with the goal of sustained gains to benefit from the unrealized value in the underlying stock.
Trading in equity has the potential to give handsome returns if approached wisely. Reach out to experts at ICICIdirect to know more about trading in equities..
Disclaimer: The contents herein mentioned are solely for informational purpose and shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.