What is Equity Trading & How It Works?

To buy or sell any product/service, you need to meet buyers and sellers at a meeting point known as a marketplace. Similarly, you need to head to the stock market to trade in equities. It is similar to other marketplaces where buyers and sellers interact but for trading in shares. So what are equity shares, and what is equity trading? 

What Are Equity Shares?

Before we discuss what equity trading is, you need to understand the concept of equity shares. A company can raise capital from the public through equity (issued shares). Equity share represents a unit of ownership of the company. These shares are free to trade on various exchanges, such as NSE and BSE in India. 

What Is Equity Trading?

Equity trading is known as selling or buying equity shares in the financial markets through exchanges. With the advent of technology, online equity trading has replaced handwritten sheets of paper as stocks.

In today’s scenario, stocks/shares are the preferred investment avenue as they diversify your portfolio while offering good returns. To invest and/or trade in these securities, you must have a Demat account and a Trading account. Before you invest and/or trade in shares, you must also know that stock prices are affected by the surrounding environment. For instance, if the demand for shares of TCS Company increases because they bagged an overseas project, its share price will increase and vice versa.

Advantages of Equity Trading

1. By investing in equities, you can earn better returns as compared to other investment avenues by staying invested for a longer period rather than for a shorter period
2. They offer better returns even during times of inflation, which means they act as an ideal hedge against inflation
3. You can earn fixed income through equities via dividends, a fixed amount of money that a company pays to its shareholders from its earnings
4. You have multiple ways to invest in equities directly and indirectly, such as IPO, shares, and mutual funds

What Is the Process of Equity Trading?

1. Open a Demat account: Firstly, open a Demat account and a Trading account. Both accounts are important as the Trading account executes transactions while the Demat account holds the shares you own.
2. Consider stock prices: Various factors affect the prices of a stock. So, before you start investing, you must understand these factors to make efficient entry and exit decisions.
3. Learn all about the stock: Fundamental analysis is a key to investing and/or trading as it helps you ascertain the stock’s actual value. While analysing a company or its stock, you must consider various factors such as assets, net worth, liabilities, and historical performance. 
4. Place a trade order: Once your company analysis is done, you need to decide on investing, and then you need to determine whether it should be a buy trade or a sell trade. 

After you have arrived at a decision, you can place an order, and the trading system will check whether the order price matches the offer by buyers/sellers and execute the trade accordingly. 

However, stock prices change frequently, which might hurt your trade negatively. To deal with such scenarios, you can place a stop-loss order. In this type of order, you will automatically exit the trade when you reach the stop loss price (the price at which you wish to exit the trade).

Which Type of Equity Trading is Considered Safe?

Although equity trading is risky, there are possible ways to lower it. Below are a few ways to help lower your risk while trading in stocks:

1. Place a stop-loss order: As mentioned previously, placing a stop-loss order is an easier way to trade safely. This is because, in this order, you exit the trade as soon as the price reaches the limit set by you. With this, you can control the loss by setting a limit, and if the price goes above and below that level, you can sell or buy the stock.
2. Check the stock’s historical performance: You can also lower the risk by entering into trades for stocks that have performed well in the past. This is because historical performance is one of the key indicators that you need to analyse while making an investment decision. Let’s understand this with an example – ABC stock prices have increased substantially over the past; this signifies that the stock has a good demand and is expected to grow. However, if the prices have declined over time, the stock isn’t performing well. 

Is Equity Trading Different From Trading on Equity?

By now, we all know what equity trading is. To recap – equity trading is buying and selling stocks in the financial markets. On the other hand, trading on equity is a financial strategy in which a company borrows funds through debts, debentures, preference shares, or loans to buy assets that will help it generate more revenue. This proves that these two concepts sound similar but have significant differences.

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