What is Equity Trading?
Equity trading or stock trading is the buying and selling of equities in the market through your registered trading account. To understand what is equity trading, you must first understand the concept of equities. Equities are a share of ownership in a company and these shares are traded freely on the NSE and the BSE for listed companies. There are over 4,700 listed equities in the BSE today. You call them by different words like equity, stock, share, etc, but they mean the same thing.
Having understood equity trading meaning, let us understand what is stock trading or equity trading in practice. Stock trading involves buying and selling equities through the market mechanism. Transfer of shares from one Demat account to another Demat account does not qualify as stock trading as it does not go through the market mechanism. Let us look in greater detail at what is equity trading.
Equity trading meaning has to be understood concerning the share market or stock market or equity market as we all popularly know it. Equities are traded in the equity market, also known as the share market or stock market. The stock market can be seen as a platform where buyers and sellers of stocks and sellers of stocks meet. Today equity trading happens in a virtual environment unlike in the past when equity trading would happen in the ring using the open cry system.
Understanding the process of equity trading
Here is a quick look at the process of equity trading, which will help you appreciate the idea in a much better sense.
- To start equity trading you need a Demat account and a trading account. The equity trading is executed in the trading account but the shares are held in the Demat account.
- The first step to equity trading is to activate your trading account and ideally, you must activate your online trading so that you can place all orders online themselves.
- When you place a buy order, the first thing the trading system does is to check if the price matches what is offered by sellers. In that case, a trade occurs.
- Your buy order will always be executed at the best available price, even if your price is anything. This ensures that irrespective of your order, only the best available order comes.
- When you place an order in equity trading the prices are dynamic. Stock prices are affected by the activity surrounding them. Normally, it is a question of demand and supply.
- In the case of intraday equity trading, you can close the trade on the same day. Otherwise, it goes into your Demat account and you have to sell from the Demat account.
- Even when you place a sell order, the execution is done at the best available price subject to available buyers at the best price.
Let us now turn to some of the advantages of equity trading
- Stock market investments, tend to outperform other investment classes over longer periods. Of course, equities can give lower returns or even negative returns in the short term, so the holding period for equities should ideally be 3-5 years.
- Equity gives the best returns during times of inflation. In other words, equities are the best hedge against inflation. This is important as it permits you to maintain your lifestyle without cutting costs.
- It is also true that equity is a riskier investment than a savings account or fixed deposit. But for this higher risk, you also earn better returns. As an equity trader, your focus must be on managing your risk and not just chasing returns. If the risk is managed, your equity market performance can be a lot better.
- Equities of most established companies with a good track record pay regular dividends. A dividend is a certain amount of money that a company pays to its shareholders from the earnings of the company. This ensures regular income on equities.
- For financial planning, you can use equities to create wealth in the long run. You can participate in equities directly through equity trading accounts or indirectly via equity mutual funds.
A quick word on clearing and settlement in equity trading
No discussion on equity trading is complete without looking at the all-important process of clearing and settlement. This is what happens behind the scenes but it ensures that your shares come to your Demat account on T+2 day when you buy and funds come into your bank account on T+2 day when you sell equities. As an equities trader, you get to see the very sophisticated screen-based trading system. There is also clearing and settlement.
The stock exchange also clears and settles all the trades executed during the day through the clearing corporation. The trades are aggregated and positions are netted off at the level of the clearing member to determine the liabilities of the trading members. Then the appropriate shares/funds are debited/credited to the clearing member account who in turn transfers the benefits/costs to the end customer. That is the behind-the-scenes activity that you normally don’t get to see in equity trading.
Importance of Equity Trading
Equity trading is important because it helps create wealth for investors. Also, it is the equity market that helps companies to raise funds through the IPO market and then list the stocks. Subsequently, such stocks are traded in the normal secondary market. Equity trading is a simple process of moving stocks from one owner to the other through the market mechanism.
Who is Eligible for Equity Trading
Anyone who is over 18 and can provide all the documents for KYC can open a trading account and start equity trading. Remember to fund your trading account as that is mandatory for delivery trading, intraday trading, and F&O trading.
Frequently Asked Questions Expand All
Brokerage is charged by the broker for equity trading. In addition, there are statutory costs like STT, GST, exchange charges, SEBI turnover fees, stamp duty which are added and shown in the contract note.
Equity as an asset class are risky in the short term but are important wealth creators in the long run. The process of equity trading is extremely safe as all trades carry the counter guarantee of the clearing corporation and so there is no likelihood of default on the exchange even if the other party is not able to honour the trade.