Types of stock market trading

There are multiple ways to participate in the stock market, but success depends on choosing the right approach. From fast-paced positions to long-term holdings, each method has its own risk and commitment. Understanding how they differ gives clarity and allows you to trade with confidence.

In this article, we break down the types of stock market trading in simple terms so you can choose the style that suits you best.

Intraday trading

Also known as day trading, it involves buying and selling securities within the same trading session. The intraday positions are not carried overnight.

In India, trades are executed when markets open from 9:15 AM to 3:30 PM. The objective here is to capture small price movements with the help of charts and technical indicators. 

The advantages of intraday trading are:

1. Quick Profit Opportunities: Small price movements can generate returns within hours if they are timed correctly.
2. No Overnight Risk: The positions are closed on the same day, which means traders are safe from news or gap openings.
3. High Liquidity: The stocks are actively traded with high volumes, allowing easy entries and exits.

Intraday trading also carries some disadvantages:

1. High Volatility: Price swings during the session increase the risk and can lead to significant losses.
2. Constant Monitoring: Intraday trading requires focus when the market is active, making it difficult for inexperienced traders.
3. Intense Pressure: Day trading moves rapidly, which can cause panic and result in impulsive decisions if discipline is not maintained.

Example
Rohan is an intraday trader. He bought 200 shares of ABC Ltd at ₹500 at 10:30 AM. By 1:30 PM, the price had risen to ₹520. He sells the shares immediately, earning ₹20 per share, and a total profit of ₹4,000. If the price had fallen to ₹470 instead, he would have suffered a loss of ₹6,000.

Scalping

Scalping is an ultra-short form of trading that aims to make small profits multiple times a day. In scalping, the positions are held for merely a few seconds to minutes.

Experienced traders who deeply know about the market, liquidity, and analysis tools are the ones generally involved in scalping.

The following merits are associated with scalping:

1. Reduced Market Exposure: The positions are held for short periods, making them less sensitive to big market crashes or reversals.
2. Numerous Opportunities: Small price fluctuations happen throughout the day, allowing more trading chances, meaning many small gains add up at the day’s end.
3. Automation Friendly: As scalping is heavily reliant on technical indicators, it becomes easy to integrate and use for quant or algorithmic trading.

The demerits of scalping are given below:

1. High Costs: More number of trades means higher transaction costs, which can eat away at the profits.
2. Stress and Time Commitment: Scalping requires closely tracking the charts and making fast decisions, which can cause stress and mental fatigue.
3. Complexity: Scalping requires advanced technical skills, high-tech trading platforms, and expertise, making it unsuitable for new traders.

Example
Neha is a seasoned scalper. She bought 500 shares of a leading bank’s stock at ₹1,600 and sold them at ₹1,603 within five minutes. Her gross profit is about ₹1,500.
If the transaction charges were ₹250, her gains are massively reduced, showing the impact of costs in scalping.

Swing trading

In swing trading, the focus is on price movements from a few days to weeks. Traders identify short-term trades and hold positions long enough to benefit from price “swings.”

Swing trading gives a balanced approach that blends active trading with moderate time commitment.

The pros of swing trading are listed below:

1. Flexibility: Unlike scalping or day trading, it does not demand constant checking of the price charts, which makes it popular among working professionals.
2. Reduced Stress: Without the need to make split-second decisions, swing trading has a calmer approach appropriate for every kind of trader.
3. Lower Costs: As lower taxes are being carried out compared to intraday, it means brokerage fees and transaction costs are generally lower.

Swing trading also has some cons that should be carefully observed:

1. Overnight Risk: The positions are carried overnight, which means more exposure to unfavourable price movements.
2. Requires Patience: Waiting is required for the “swing” to play out, making it difficult for those seeking instant results.
3. Capital Lockdown: As the funds are held in position for many days, it reduces the liquidity and can lead to missing out on upcoming opportunities.

Example

Amit identified a bullish breakout in Tata Motors when it was trading close to ₹800. He took a long position of 100 shares, anticipating the upward trend to continue. Over the next 15 days, the price had climbed to ₹885. Amit took an exit, earning ₹8,500 from the trade.

Position trading

Position trading is a longer approach where importance is placed on broader trends and industry growth rather than daily fluctuations. 

It is very close to investing, but still has the element of timing the entries and exits. The objective is to earn from the general trend of the particular market or asset.

Position traders enjoy the following benefits:

1. Less Time-Intensive: Position trading does not demand constant monitoring, making it ideal for busy individuals.
2. Reduced Emotional Stress: As short-term fluctuations are not the focus, it means the traders can take a more relaxed and stress-free approach.
3. Captures Major Trends: Position trading aims to benefit from significant long-term moves, making it a potential high-return generator.

Despite the benefits, position trading also has some drawbacks:

1. Exposure to Market Cycles: The holdings are carried for long periods of time, making them riskier in case of economic slowdowns or unexpected price breakouts.
2. Locked-in Funds: The investment amount is tied up for an extended period, which means lower liquidity for other trading opportunities.
3. Requires Patience: Position trading demands patience and advice to yield its actual benefits.

Example
Aryan has been tracking the IT sector for the last year. After the quarterly earnings report, he bought shares of a company at ₹1,200 and held the position for 6 months. The stock eventually surged to ₹1,550, giving him a profit of ₹350 per share.

Momentum trading

Momentum trading involves trading positions in stocks moving strongly in one direction. This approach is based on the belief that a stock undergoing a trend will continue to do so for some time.

This style is very effective in trending markets, but caution should be paid as sharp swings can lead to reversals and erode the gains.

Momentum trading has the following advantages:

1. Clear Signals: It makes use of technical indicators that make identifying entry and exit points simpler.
2. Adaptability: Momentum trading can be used in different markets like stocks, cryptocurrencies, and forex, making it flexible.
3. Quick Gains: Market swings can result in significant price changes, which can be a viable opportunity for earning quick profits in short periods.

It sounds lucrative, but momentum trading has its own share of disadvantages as well:

1. High Risk and Volatility: Sudden reversals triggered by shifts in market sentiment can turn profits into heavy losses.
2. Timing Sensitivity: The timing of your trade is critical, as entering or exiting after the trend has passed means lower or no profitability at all.
3. Ineffective in Sideways Markets: This style doesn’t perform well when markets are range-bound and may produce false signal trapping traders.

Example
Shrey notices that Adani Green is rising sharply from ₹2,000 to ₹2,150 in two days due to positive news from the renewable energy industry. She buys at ₹2,150. The stock reached ₹2,300 in three days. She exits with a ₹150 per share gain. If the momentum had reversed, her profits would have disappeared quickly.

Delivery trading

Delivery trading is a long-term approach where securities are bought with the intention of holding them for some time. The shares are credited to the trader’s demat account with no mandate on the selling day or time.

It is also known as investing and is preferred by individuals looking for gradual wealth creation over time.

The pros of delivery trading are:

1. Ownership: Investors have full ownership of shares, meaning they receive dividends, bonus shares, and voting rights.
2. Wealth Accumulation: Delivery trading allows compounding to work, resulting in price appreciation over the years.
3. No Time Limit: The shares can be held as long as desired, providing flexibility for different investment strategies.

Delivery trading is not for everyone. Its cons are:

1. Capital Intensive: It requires full upfront payment for the shares, meaning no margins or leverage can be used to take positions.
2. Opportunity Cost: If the capital is stuck in slow-performing assets, it results in missing out on other profitable avenues.
3. Market Downturns: The long holding positions mean more exposure to the broader market changes and losses during periods of slow or negative growth.

Example
Sanjay took a delivery of 100 shares of ITC at ₹450. After a year, the stock has risen to ₹520 while paying a ₹15 dividend. His gain was ₹7,000, and he also received dividend income of ₹1,500.

Bottomline

There is no single approach that guarantees stock market success. What works for one person may not suit another. The trading style is determined by your financial goals and risk appetite. 

The key lies in gaining knowledge and staying consistent. Over time, patience matters far more than chasing quick gains.

FAQs