» Stock Trading
Stock trading is the process of buying or selling of shares on a stock exchange, where investors are represented by stock brokers. A company that floats its stocks is called a public company and is listed on a stock exchange. Stock trading can be done either physically or virtually (online).
Stock Trading: Approaches
There are two main approaches to stock trading:
Active approach: This is the more common of the two approaches. The decision to buy stocks involves analyzing the company, reviewing the historical share price trends and understanding the current forecasts. Active investors are guided by the growth and intrinsic value of the stocks. This approach is mostly applied by the investment managers who manage mutual funds, pension funds and separately managed individual accounts.
Passive approach: This approach is opted for by investors who prefer low-risk, high-yielding stocks and invest money in them mainly for their retirement accounts. This approach assumes the efficiency of markets in the longer term. It is, however, not synonymous with the strategy of ‘buy-and-hold.’ Rather, it implies buying at low prices and selling when the stocks have reached a high price level.
Benefits of Stock Trading
Here are some benefits of stock trading:
- Buying and selling stocks offers better returns than other financial instruments.
- Stock trading can be done on a full time or part time basis.
- Online stock trading can be used as a form of home-based income generation for housewives, the elderly and the physically challenged.
- Stock trading offers scope for diversification across companies, geographies and sectors.
Disadvantages of Stock Trading
Some disadvantages of stock trading are:
- Leverage in stock trading is much lower than that in forex trading or futures trading.
- Traders may have to wait a long time for the price of a stock to rise. Inability to short curtails their profits.
Stock trading takes place via brokers, who are registered with stock exchanges. Stock traders can choose between full service brokers and discount brokers.
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