Trading is the process of buying and selling financial instruments such as stocks, bonds and derivatives. Traders can be either professionals working for financial institutions, or individual investors. Trading is done in stock markets, derivatives markets and/or commodity markets.
Based on the nature of their trades, traders are given various designations, such as:
- Pattern day trader (those who execute four or more day trades in a week).
- Rogue trader (an authorized employee who does unauthorized trading on behalf of his employer).
- Floor trader (a member of an exchange, who makes trades on the floor for his/her own account).
Traders employ trading strategies in order to make effective decisions. Such a strategy is governed by a rigid set of guidelines. A trading strategy is developed after considering factors such as return, risk and volatility. Its workability can be tested by verifying its success in the past through the use of computer programs. Automated trading strategies eliminate the impact of emotions on trading.
Types of Trading
Stocks Trading: A share of stock means a share of ownership in a corporation. An individual or firm trading primarily in shares in the stock markets is called a stock trader. These stock traders usually profit from short term volatility in the prices of stocks. This type of trading may last from a number of seconds to a few weeks.
Futures Trading: Futures are standardized contracts that are traded on a futures exchange. It comprises non-traditional commodities such as foreign currencies, bonds (commercial or government paper) or stock indices (a basket of corporate equity). Futures are bought or sold at the current price for a future date, which is also called as the delivery date.
Options Trading: An option is a contract through which a buyer gets the right to buy or sell the underlying asset at a later point of time on an agreed price. A premium is paid to the buyer for granting such an option. A ‘call’ option is offers the right to buy whereas a ‘put’ option offers the right to sell the underlying asset.
Trading can take place over periods of varied length such as day trading, long term trading, swing trading and intraday trading.
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