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Trading, it's types, Assets, Brokers, ETF

  • Trading is essentially the exchange of goods and services between two entities.
  • It is the basic principle which forms the core of all economic societies and financial activities.
  • You can easily buy or sell Mutual Funds, Share Stocks, Bonds and other securities with or without a dedicated agent.
  • Best broker for me: Groww


What are Assests?

When you trade, you trade financial assets of one kind or another.
There are different classes, or types, of assets – such as fixed income investments - that are grouped together based on their having a similar financial structure and because they are typically traded in the same financial markets and subject to the same rules and regulations.
There’s some argument about exactly how many different classes of assets there are, but many analysts commonly divide assets into the following five categories:

  • Stocks, or Equities: Equities are shares of ownership that are issued by publicly traded companies and traded on stock exchanges.
    You can potentially profit from equities either through a rise in the share price or by receiving dividends.
  • Bonds: Bonds are investments in securities that pay a fixed rate of return in the form of interest.
    While not all fixed income investments offer a specific guaranteed return, such investments are generally considered to be less risk than investing in equities or other asset classes.
  • Cash: The primary advantage of cash or cash equivalent investments is their liquidity.
    Money held in the form of cash or cash equivalents can be quickly and easily accessed at any time.
  • Real estate: Real estate or other tangible assets are considered as an asset class that offers protection against inflation.
    The tangible nature of such assets also leads to them being considered as more of a “real” asset, as compared to assets that exist only in the form of financial instruments.
  • Futures and other financial derivatives: This category includes futures contracts, the forex market, options, and an expanding array of financial derivatives.



Where to start TRADING?

The stock market is a highway that leads you to opportunities for wealth creation.
The share market has the potential to give you big profits that to in a very short period of time, however due to volatility and lack of knowledge you can get into losses as well.
So, it is important to learn how to trade in share market as beginners without jumping directly into it.
For the buying and selling of assets, there are three popular types of markets that facilitate trade:

  • DealersA dealer market operates with a dealer who acts as a counterparty for both buyers and sellers.
    The dealer sets bid and asks prices for the security in question, and will trade with any investor willing to accept those prices.
    Securities sold by dealers are sometimes referred to as being traded over-the-counter (OTC).
  • BrokersA broker market operates by finding a counterparty for both buyers and sellers.
    When dealers act as the counterparty, the delay with brokers finding an appropriate counterparty results in less liquidity for brokered markets as compared to dealer markets.
  • ExchangesOf the three types of markets, the exchange is the most highly automated.
    However, if no buyers and sellers are able to meet in terms of price, then no trades are executed.
    Because of the huge number of potential buyers and sellers trading through exchanges, such a situation is extremely unlikely and commonly only occurs in times of economic crisis.
    In practice, the large numbers of buyers and sellers makes a stock exchange virtually just as liquid as a dealer market.


What are the top share brokers? Where I can start trading?

Though everything starts with Demat account, without which you cannot trade, here are the top 3 share brokers, my personally tried and tested which helps in opening the Demat account first and then let you start trading:



What are the types of Trading?

Primarily, there are 5 types of Share Trading:

  • Day Trading: Traders who open and close trading positions within a single trading day, favor analyzing price movement on shorter time frame charts, such as the 5-minute or 15-minute charts.
  • Scalping: Also known as, Micro trading, where traders go for small profits many times in a single day.
  • Swing Trading: Here traders used to earn profits from stocks within few days of purchasing it.
  • Momentum Trading: Traders look for the pattern here, if it is upward, they sell the shares and if it is downwards, they buy it.
  • Position Trading: Traders hold the shares for months aiming for long-term potential.


What are Exchange-Traded Funds or ETF?

An exchange-traded fund (ETF) is an investment fund that holds assets such as stocks, commodities, bonds, and foreign currency.
An ETF is traded like a stock, throughout the trading day, at fluctuating prices.
ETFs have begun to eclipse mutual funds as a favored investment vehicle because they offer investments beyond just stocks, and because of the fact that ETFs often have lower transaction costs than the average mutual fund.


What are different types of ETFs

There are many types of ETFS, including the following:

  • Stock ETFs: These hold a particular set of equities or stocks and are similar to an index. Stock ETFs commonly hold a selection of stocks in a given market sector.
  • Index ETFs: These ETFs have portfolios that are designed to mimic the performance of a specific stock index, such as the S&P 500 Index. They only make portfolio changes when changes happen in the underlying index.
  • Bond ETFs: These are specifically invested in bonds or other fixed-income securities.
  • Commodity ETFs: These ETFs hold physical commodities, such as agricultural goods, natural resources, and precious metals.
  • Currency ETFs: These are invested in a single currency or a basket of various currencies, and are widely used by investors who wish to gain exposure to the foreign exchange market without using futures or trading the forex market directly.
  • Inverse ETFs: These are funds built by using various derivatives to gain profits through short selling when there is a decline in the value of broad market indexes.
  • Leveraged ETFs: These funds mostly consist of financial derivatives that are used to amplify percentage returns. It’s important to note that while leveraged ETFs increase profit potential, they also likewise increase risk.
  • Real Estate ETFs: – These funds invest in real estate investment trusts (REITs), real estate service firms, and real estate development companies.

What are the Advantages of Investing in ETFs?

There are many advantages to investing in an exchange-traded fund, including:

  • ETFs usually offer a significantly lower expense ratio than the average mutual fund.
  • ETFs offer exposure to asset classes that were previously hard for individual investors to access, and provide investors with the possibility to own assets such as emerging markets bonds, gold bullion, or crypto-currencies.
  • ETFs clearly disclose their daily portfolio holdings.
  • Because they can be bought or sold in secondary markets throughout the day, ETFs are extremely liquid.
  • ETFs pose a major tax advantage over mutual funds


What is F&O and how is it different from equity trading?

Futures and Options(F&O) are simply contracts which allow a market participant to purchase and sell a stock at a specific price and on a future date.
Futures and Options (F&O) are the most common derivative contracts where two parties enter into a contract.
It is speculative in nature and considered a safer option than the share market.
Although futures & options are said to be high-risk trading instruments given the higher capital requirement in terms of minimum quantity to trade, yet these are seen as a go to product by traders and speculators due to ample liquidity, mainly in the index contracts such as Nifty and Bank Nifty.
The trading volume in the F&O segment is considerably higher compared to the cash segment
Here:

  • All contracts have an expiry date
  • Each contract represents an underlying stock/index
  • The future price moves in tandem with the underlying asset
  • Contracts are traded in a fixed Lot Size, and multiples thereof
  • Index future contracts are available in monthly series, while index options are available on weekly and monthly expiry
  • Stock F&O are available only up to 3-month future expiry dates, whereas one can trade in index contracts up to 5-year future expiry dates


Is Futures and Options, Same?

The basic difference between Futures & Options:

  • A future contract requires a buyer to purchase shares and a seller to sell shares on a specified future date
  • Option contract gives the buyer and seller the right, but not the obligation to sell or purchase
  • So, if needed, you can opt out of your options any given time


Options are further divided into 2 sub categories:

  • Calls: If you are bullish on a stock/ index and expect the price to rise in future, you can buy Calls or Sell.
  • Puts: If you are bearish on a stock/ index and expect the price to fall, you can chose Puts option.


What are the Different Ways to Buy and sell stocks?

Investors should contact their brokerage firms to determine which types of orders and trading instructions are available for buying and selling as well the firms’ specific policies regarding such available orders and trading instructions.
Four most famous ways are:

  • Market Order: A market order is an order to buy or sell a stock at the best available price.
    Generally, this type of order will be executed immediately.
    However, the price at which a market order will be executed is not guaranteed.
  • Limit Order: A limit order is an order to buy or sell a stock at a specific price or better.
    A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.
    A limit order is not guaranteed to execute.
    A limit order can only be filled if the stock’s market price reaches the limit price.
    While limit orders do not guarantee execution, they help ensure that an investor does not pay more than a predetermined price for a stock.
  • Stop Order: A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified priceor the stop price.
    When the stop price is reached, a stop order becomes a market order.
    A buy stop order is entered at a stop price above the current market price.
    Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short.
    A sell stop order is entered at a stop price below the current market price.
    Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own.
  • Stop-limit Order: A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order.
    Once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better).
    The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.


What is FOREX Market Trading?

FOREX, also known as foreign exchange or FX trading, is the conversion of one currency into another.
It is one of the most actively traded markets in the world, with an average daily trading volume of $5 trillion.
The forex market trades fluctuations in the exchange rate between currency pairs, such as the euro and the US dollar, which is stated as Eur/Usd.
In the quoting of exchange rates, the first currency in the quotation is known as the base currency and the second currency is the quote currency.
The exchange rate for a currency pair appears as a number like 1.1235.
If the pair Eur/Usd is quoted as 1.1235, that means that it takes $1.12 (and 35/100th) in US dollars to equal one euro.
The most widely traded currency pairs are the US dollar (Usd), the euro (Eur), and the British pound (Gbp).


Understanding FOREX and related terms

  • The smallest fluctuation in an exchange rate is called a Pip.
  • With most currency pairs, which are quoted to four decimal places, a pip equals 0.0001.
  • The primary exception is Japanese yen currency pairs that are only quoted to two decimal places so that a pip equals 0.01.
  • Many brokers now quote to five decimal places, with the last number signifying a fractional 1/10th of a pip.
  • The value of a pip depends on both the currency pair being traded and what lot size is traded.
    For one standard lot, a pip commonly equals $10 (US); trading mini-lots, a pip equals $1; and trading micro-lots, a pip equals 10 cents.
    The value of a pip varies slightly depending on the currency pair being traded, but those figures are roughly accurate for all pairs.


How does forex trading work?

There are a variety of different ways that you can trade FOREX, but they all work the same way: by simultaneously buying one currency while selling another. Traditionally, a lot of forex transactions have been made via a forex broker, but with the rise of online trading you can take advantage of forex price movements using derivatives like CFD trading.
CFDs are leveraged products, which enable you to open a position for a just a fraction of the full value of the trade. Unlike non-leveraged products, you don’t take ownership of the asset, but take a position on whether you think the market will rise or fall in value.
Although leveraged products can magnify your profits, they can also magnify losses if the market moves against you.


What is the spread in forex trading?

The spread is the difference between the buy and sell prices quoted for a forex pair. Like many financial markets, when you open a FOREX position you’ll be presented with two prices. If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price – slightly below the market price.


What is a lot in forex?

Currencies are traded in lots – batches of currency used to standardise forex trades. As forex tends to move in small amounts, lots tend to be very large: a standard lot is 100,000 units of the base currency. So, because individual traders won’t necessarily have 100,000 pounds (or whichever currency they’re trading) to place on every trade, almost all FOREX trading is leveraged.


What is leverage in forex?

Leverage is the means of gaining exposure to large amounts of currency without having to pay the full value of your trade upfront. Instead, you put down a small deposit, known as margin. When you close a leveraged position, your profit or loss is based on the full size of the trade.
While that does magnify your profits, it also brings the risk of amplified losses – including losses that can exceed your margin . Leveraged trading therefore makes it extremely important to learn how to manage your risk.


What is margin in forex?

Margin is a key part of leveraged trading. It is the term used to describe the initial deposit you put up to open and maintain a leveraged position. When you are trading forex with margin, remember that your margin requirement will change depending on your broker, and how large your trade size is.
Margin is usually expressed as a percentage of the full position. So, a trade on EUR/GBP, for instance, might only require 1% of the total value of the position to be paid in order for it to be opened. So instead of depositing AUD$100,000, you’d only need to deposit AUD$1000.