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Benefits of Equity Trading

Benefits of Equity Trading

Equity trading helps traders to participate in the shifts in value of the stock and also in the movements of the market. It enables you to make the best of the short term opportunities that occur due to technical supports, breakouts and news based flows. You can do equity trading either offline or online and that makes it a lot more flexible. It also helps the market because the liquidity created by the equity traders makes the market more liquid and therefore less risky. Equity trading is the first step towards long term wealth creation.

Some key advantages of equity trading

  • Equity trading is extremely flexible. You can either call up your broker and trade or you can sit in the comfort of your home or office and trade with your computer or laptop. Nowadays, it is also possible to trade on your mobile phones or smart phones by merely downloading the application (app) on to your phone and executing orders.
  • When you are trading, the commissions are much lower. In fact, if you trade intraday, the commissions are much lower on both legs of the transaction. Not only the brokerage but even the statutory charges are much lower in case of intraday trading. For example, the rate of STT is much lower and it is only imposed on the sell side of the transaction.
  • Equity trading offers much higher leverage to trade. Normally, when you buy equity for delivery, you need to put up the full amount latest by T+1. In case of short term trading, the broker will be willing to give you leverage up to a multiple of 4-5 times your margin. That means you can take larger positions with smaller capital allocation.
  • Equity trading makes it possible to make money quite fast. For example, we have seen volatile stocks moving up by 30-40% in a span of a few days. When you are trading intraday, you can take positions on the long side and on the short side. Short term trends and announcements can be best captured in short term equity trading.
  • Unlike what a lot of traders tend to believe, short term equity trading is not very complicated. It is more about getting your process and discipline in place. Once your risks are properly managed, the returns will follow. In fact, you can get the satisfaction of seeing your money grow rapidly in a very short span of time. That is quite gratifying.

Managing risks in equity trading

More than chasing returns, it is managing risk that is of paramount importance when it comes to equity trading. Here is how to go about it.

  • When you are trading in equities for the short term, be very clear that you are a trader and not an investor. That means you must really think from a short term perspective only. Just because price movements go against you, don’t try to average your positions. When you average your positions it is like going wrong twice over. Also your focus should be churning your capital aggressively and for that you need to keep booking profits.
  • The second way to manage risk is through stop losses. This is your insurance against volatile markets. The stop loss can be set based on technicals or affordability. The idea is to protect your capital by not letting losses mount beyond a point.
  • The last way of managing risk is to constantly monitor positions. Set news alerts, price alerts, corporate announcement alerts and chart alerts. These can give you clues well in advance and you can take action accordingly.
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