Day Trading

In day trading, financial instruments are bought or sold during the same trading day. Here all positions are closed before the market closes for the day. A day trader buys and sells rapidly over a short span, taking advantage of the price swings. A day trader is also known as an active trader. Futures, stocks, options, and currencies are some of the common financial instruments which are traded in this manner.

How is Day Trading done?

At first only financial companies had access to stock exchanges. Hence, day trading was an option that was open only to them. But now due to the technological advancements, individual investors can also practice day trading.

A typical day trading session involves some simple steps. One needs to have access to a computer and Internet. The next step is to register yourself with an online broker. Investors can then start looking for real-time quotes online. This allows them to decide whether to buy or sell and settle the deals online with a click of the mouse.

Benefits of Day Trading

• In order to do day trading one only needs to invest in a computer and trading software, which is rather inexpensive.

   

• Day trading provides traders the flexibility of the timing of investing.

   

• A trader or investor has the freedom to adopt his/her own style, strategy and technique of investing, based on the trading objectives.

   

• Day traders need not worry about overnight uncertainties. Deals are settled during the business hours and closed positions.

   

Risks of Day Trading

• Day trading can be very stressful, since decisions are to be made quickly.

   

• When money is involved, then emotions often take over. Day traders may suffer as a result of fear or greed or ignorance

   

• Often investors make decisions hastily, resulting in increasing the risk.

   

Types of Day Trading

There are three types of day trading -

• Trend trade (that involves buying the shares when prices are showing upward trend)
• Counter trade (that involves selling the shares when prices are rising) and
• Ranging trade (that involves trades moving in a back and forth manner between 2 prices).

While the trend trade moves in the same direction as the price, counter trade moves against it. Ranging trades are trades that are executed during a sideways movement in the market.

Characteristics of a Day Trader

Day traders are typically well-established in the particular field and have in-depth knowledge of the marketplace. Following are some of the prerequisites for day trading:

• Knowledge and Experience in the Marketplace:

  Good knowledge about the market and market trends is very essential while day trading. Individuals attempting to day trade without the basic knowledge and understanding of the basics of market often end up losing money.

   

• Sufficient Capital:

  One should not expect to make money by day trading. Day traders use only risk capital that they can afford to lose. Not only does this protect them from financial crisis, but also helps eliminate emotion from their trading. A large amount of capital is necessary to capitalize effectively on the intra-day price movements.

   

• A Strategy:

  A trader needs to have an edge over the rest of the market. There are several different strategies that day traders make use of, such as: swing trading, arbitrage as well as trading news, among the rest. These strategies are refined until they result in making consistent profits and effectively limit the losses.
  

Online Trading

The process of buying and/or selling financial securities, currencies and commodities through the Internet is known as online trading. For this purpose of trading online, investors need to exercise patience as well as use the right proprietary softwares provided by several brokers.

Online trading is an internet based investment activity which does not involve any direct involvement of the broker. There are several leading online trading portals in India along with the online trading platforms of the biggest stock houses like the NSE and BSE. The total section of online share trading in India has been found to have grown from only 3 per cent of the total turnover in 2003-04 to 16 per cent in year 2006-07.

How to Trade Online

The investor needs to register with an online trading portal and get into an agreement with the firm to trade in different securities as per the terms and conditions listed down in the agreement. The order processing is done in correct timings since the servers of online trading portal are connected to the stock exchanges and designated banks all round the clock. Updates can be received on the trading and investors can check the current status of their orders either through e-mail or through the interface. Brokerages also provide research content on websites, so that the clients can take their own decisions on the stocks before they invest.

Thus in online trading, orders are implemented through online trading platforms offered by various brokers. Investors place their orders directly on a broker's site. The broker then executes the orders on the stock exchange and also makes payments on behalf of the clients. Brokers also provide clients with information related to market data, news and charts through their online platforms. This is done to help them in making informed decisions. Brokers charge software usage fees and trading commissions for their services. An investor is able to trade in more than one product/market through the same account and software.

Benefits of Online Trading

• Transparency: Online trading provides transparency on all the information related to the time of order placement till the final settlement. Every step of online trading is subject to scrutiny, since this provides transparency to the trading process.

   

• Best prices: Investors, by way of online trading, can get the best quotes for securities because of high transparency in the system.

   

• Added convenience and liquidity: One can carry out online trading anytime during business hours. This also helps in providing liquidity to investors.

   

• Low commissions: Investors can make transactions frequently, without the need to worry about the burden of commissions; thus making day trading and short-term trading more feasible.

   

Dangers of Online Trading

• Technology problems: Delays in transactions may be caused due to Internet connection outages or power failures.

   

• A mentor's absence: As there is no guidance from professionals, online trading may involve formulation of improper trading strategies which in turn would lead to huge losses

   

• Overtrading: Online traders usually have a long term strategy before investing. However, the attraction of capitalizing on short term movements might make them buy and sell more often. Since the commission levels in online trading are low, investors are lured into day trading. This takes them away from their well-researched and long term trading strategy, causing great losses in the long run.

   

Tips for Online Trading

• Set limit orders on trading of stocks.

   

• Avoid overtrading. Do not trade a several stocks at one time.

   

• Do not form decisions based on daily ups and downs.

   

• Observe long term trends.

   

• Stay away from trading based on rumors.

   

Online trading is an excellent tool to earn a living and to supplement regular income. However, before venturing into online trading, an investor must carefully research on the risks associated with online trading and must be prepared for the same before investing.

Options Trading

Introduction

The trading of stock options over an exchange is known as Option Trading/Options Trading. Since options trading is happens many a times through online option trading brokers, it is also known as Online Options Trading.

At times options trading and futures trading are clubbed into one term known as Options Futures or Futures Options or even Futures Option Trading and are believed to be the same thing. However, it must be noted that Options and Futures are two different forms of financial instruments and cannot be considered as one. Futures Options are options written on futures contract and is a distinctly different trading instrument. The options which are traded in the stock exchange are the index options or equity/stock options.

Types of Options

There are basically 2 classes of options, Call Options and Put Options.

• Call Options gives the buyer the right to buy an underlying asset.
• Put Options give the buyer the right the sell an underlying asset.

Creative use of both these classes leads to a limitless combination of possible option strategies. Options trading strategies are able to perform wonders like profiting from both an up or down move, or profiting even during the times when the underlying stock remains stagnant.

Benefits of Options Trading

1. Leverage

   Trading options allows one to potentially make over ten times more money in the underlying stock rather than buying the stock itself. The leverage power ofoptions trading could be the main reason why traders having small funds choose options trading. Although option trading was originally designed for hedging purpose instead of a leverage tool, option trading still remains a great way to profit by risking a very little amount of money. The leverage in options trading is unique i.e. it's not a fixed amount but a variable amount of leverage that can be used by choosing different strike prices and expiration months. This variability makes trading in options a suitable option for investors with any risk tolerance.

2. Protection

   Trading in options also provides protection. When a stock moves adversely, an options trader potentially loses much lesser as compared to a stock trader. This is because, incase of options, the maximum loss is limited to the price that is paid for the option which could be only 10% of the price of the stock, or may be even lesser. One can also protect one's stocks from dropping in value by way ofoptions trading by buying the same number of put options as number of shares owned. In such a case, the put options act as an insurance policy, which protect the shares from dropping in value.

3. Flexibility

   Trading in options allows one to profit from every possible change or move in the underlying asset. Up/Down/Stagnant, there exists an option strategy will still allow you to make profit irrespective of the move. Incase of options trading, a trader can participate in a downwards move on the stock by buying a put option without even having to risk margin calls by going short the underlying stock/futures.

Forex Trading

Forex trading [FX trading] involves the buying and selling of currencies of various different nations. In this type of trade, currencies are exchanged on a continuous basis in the forex market that covers the globe. People have several opportunities for profit-making in forex trading when value of one currency fluctuates against that of another.

Forex trading is quite popular due to several factors like the leverage available, the high liquidity 24 hours a day and the very low dealing costs.

Evidently many commercial organizations participate in such trades purely due to the currency exposures created through their import and export activities, but the major part of the turnover is accounted for by financial institutions. Investing in foreign exchange remains mainly the domain of the big professional players in the market, such as funds, banks and brokers. Nonetheless, any investor having the necessary knowledge of the market's functions can also benefit from the advantages stated above.

People conduct Forex Trade to:

1. To Make direct foreign investments
2. Earn profits and make money from short-term fluctuations in the values of a currency pair
3. Control their existing positions in the market
4. Fulfill their import and export needs

In forex market, there does not exist any centralized exchange, trading is conducted either through the Electronic Broking System (EBS) or online through the Internet. Online forex trading is very popular among individual investors. High leverage, flexibility and liquidity are the three main factors that attract people towards forex trading.

How is Forex Trading Conducted?

Similar to other transactions, forex trading involves sellers, buyers, and intermediaries. While buyers and sellers in this market could be banks, investment management firms, commercial companies, hedge funds and retail investors, the intermediaries are the brokers. Forex brokers act as market makers and place bid and ask prices for a currency pair on behalf of the buyer or the seller.

Buyers make money by buying a currency at a lower price and selling it later at a higher price. All transactions by individual traders in case of the forex market occur through brokers. However, the majority of the forex trade is conducted between banks.

Benefits of Forex Trading

1. It is done in an extremely liquid market. Hence, one is unlikely to get stuck in a trade. He/she can open and close any position according to his/her desired level.

    

2. Traders can make profits in both rising and falling markets. One can take a short position (selling the currency pair and purchasing it back at a lower price) or long position (purchasing the currency pair and selling it later at a higher price).

    

3. Gives traders an option to trade in small lots. This allows a beginner or a novice trader to begin with small amount of capital and limits the risks.

    

4. Traders don't need to pay commissions to brokers. The transaction cost is built into the currency price and is known as spread, which is actually the difference between the buying and selling price at a given time.

    

Drawbacks of Forex Trading

Forex trading could lead to huge losses incase the trader is a novice. The lack of prompt action can also lead to significant losses.

Can I invest directly in stock market or invest through mutual funds?

Where do we invest our long term money?

Where can I get better returns which can beat inflation?

The answer for both the questions is investing in stock market. Once you decide to invest in stock market, you have got two options. The option one is to invest directly in stock market and the option two is to invest through mutual funds.

https://www.holisticinvestment.in/stock-market-vs-mutualfund

Regards

Ramalingam K, MBA, CFP,

Director and Chief Financial Planner,

Holistic Investment Planners

“Best Performing Financial Advisor Award” Winners from CNBC TV18

www.holisticinvestment.in

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