Investing in the stock market can seem risky, but people of all ages are eager to start investing in equity shares. Even experienced investors face challenges, despite using strategies to manage risks. While there’s a chance of losing money when you invest in stocks, history shows that stocks can offer better returns than safer options like fixed deposits and bonds. Buying shares can be attractive for beginners, but it’s important to understand the risks involved. So, let’s look at what equity trading is and the risks that come with it.
What is Equity Trading?
Equity trading consists of buying and selling shares in the primary or secondary market, either through a stock exchange like the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) or over-the-counter transactions.
There are various approaches to equity trading. Some traders close their positions within a single trading day, known as intraday equity trading. Others prefer to capitalise on price movements over a longer period, spanning days, weeks, or even months—this is called swing equity trading.
When placing orders, traders may choose between active orders and passive orders. Active orders are executed immediately at the current market price, which is often used by traders looking to quickly enter or exit positions. In contrast, passive orders are placed with a limit price and are executed only when the market price reaches the specified level, allowing traders to potentially achieve a better price but with the risk of the order not being filled.
Individuals must have a trading and demat account to start with equity trading. While the costs of opening such an account may differ but the process is generally simple. You can also open free demat account with HDFC Sky.
Risks You Should Know About Equity Trading
When buying shares and securities, you should be aware of several types of risks:
Systematic Risk (Market Risk)
This risk comes from daily price fluctuations in the stock market. Changes in key market indices, like the Sensex and Nifty, often influence individual stock prices. For example, if the Sensex drops by 500 points, you might see many stocks decline in value. This overall market movement can reflect the economic strength of a country. If the economy weakens, you can expect stock prices to fall too.
Liquidity Risk
When you invest in shares, you should hold them long-term. However, you might face liquidity risk if you need to sell quickly. This risk arises when there aren’t enough buyers for your shares. For instance, selling your shares without dropping the price could be difficult if you own small-cap stock that doesn’t trade much. Additionally, if a company faces financial trouble, its stocks may become harder to sell.
Business Risk
Investing in the stock market can yield profits if you research the company properly. The management and leadership of a company are crucial for its success. If a company is poorly managed, it might face operational challenges. For example, if a major factory strike disrupts production, the company’s stock may drop as investors worry about future profits.
Inflation Risk
Inflation can significantly impact stock prices. If inflation rises, the value of your investment can decrease over time. For example, if you invest in a stock today and inflation hits 5% over the next year, your returns might not keep pace with rising costs. This means your money’s purchasing power can shrink, reducing the real value of your investment.
Currency Risk
If you invest in foreign stocks, currency fluctuations can affect your returns. For example, suppose you buy shares in a U.S. company while the Indian rupee is strong against the dollar. If the rupee weakens later, your returns will decrease when you convert them back to rupees. This can significantly impact your overall investment gains.
Taxation Risk
Tax laws can change, which may affect your investments. If the government imposes new taxes or increases existing ones, the company’s stock price could drop. For instance, if capital gains taxes are raised, investors may sell their shares quickly to avoid higher tax rates, causing stock prices to fall.
Interest Rate Risk
Interest rates set by the government can influence the economy and financial markets. If interest rates rise, companies may pay more for loans. This can cut into their profits. For example, if a company has to pay a higher interest rate on its debt, its stock price might decline as investors anticipate lower earnings.
Why Understanding Risks in Equity Trading is Important?
Knowing the risks of buying shares and securities is essential because you can lose your entire investment quickly. The more you invest, the more you can lose if the stock prices don’t move as you expect. Stock prices can change a lot, which is why many people are cautious about investing in the share market. However, if you understand the risks, you can take steps to reduce them and improve your chances of getting good returns.
Different Types of Strategies in Stock Trading
Knowing different techniques can help you make better decisions when you trade stocks. The following are a few types of stock trading strategies:
Value Investing
Value investing involves investing in discounted stocks with solid fundamentals. Investors believe the market will eventually recognise the full value of the stock.
Investing in growth
Growth investors seek out businesses anticipated to develop faster than the industry average. They emphasise the potential for earnings rather than dividends.
Investing in dividends
This strategy focuses on companies that consistently distribute dividends. Investors hope to gain from capital appreciation and a consistent income source.
Technical analysis
This method forecasts future market movements by analysing past price data and chart patterns. Traders frequently rely on trends and indicators to make wise selections.
Fundamental Analysis
When making investment selections, investors that employ this method assess a company’s financial standing, including its earnings, revenue, and market position.
Conclusion
Overall, equity trading can be a powerful way to grow your wealth over time. You can improve your chances of success by understanding how the stock market works and the risks involved, making informed decisions, and avoiding common mistakes. With persistence, you can become a skilled trader and enjoy the rewards of investing in equity.
Start small, stay disciplined, and be ready for both ups and downs in the market. With time and experience, you can build a strong portfolio that reflects your financial goals.
Open a free demat account online with HDFC Sky, one of India’s top stock trading app! Enjoy seamless equity investment and easily invest in stocks, mutual funds, and ETFs. Benefit from the margin trading facility for added flexibility and enhanced returns. Start your trading journey today!
