Types of Trading in the Stock Market

In this article, we will discuss

Whenever you hear the term ‘trading’ in the context of the stock market, you may immediately think of buying stocks and selling them via stock exchanges. While this is certainly one type of trading, it is not the only one. You can trade in stocks as well as in other types of derivatives like options and futures. All types of trading in the stock market become easier if you have the right trading platform at your disposal, like the trading app from Samco Securities, which is integrated with various advanced trading tools and features — all available free of cost to Samco’s customers.

The first step to getting better at the different types of trading is to understand what they are and what they entail. So, in this article, we will take a closer look at the many types of trading and investing possible in the Indian stock market.

The Primary Types of Trading in the Stock Market

You can classify stock trading into different types based on the type of instruments traded. Broadly, the different types of trading include direct equity trading and derivatives trading. Direct equity trading essentially involves trading the spot market or the cash segment. It involves buying stocks at one point and then selling them later (or short-selling them, where you sell first and then buy).

Derivatives trading, on the other hand, involves buying and selling different types of derivatives like options and futures. These derivatives have equity stocks or stock market indexes as their underlying assets. Let us discuss each type of stock market trading in greater detail.

Intraday Trading

Intraday trading is a type of spot market trading where each open position is closed within the same trading session. You may take a long or a short position in the stock market, but in this type of trading, the position must be closed before the market closes for the day.

  • An Example of Intraday Trading

Say you notice an upward trend in a particular stock in the first hour after the market opens. So, you buy 100 shares of that company at Rs. 120 each. You monitor your position closely and when the stock’s price reaches Rs. 130, you sell the 100 shares at a total profit of Rs. 1,000.

  • Important Things to Know About Intraday Trading

Keep in mind the following key aspects of intraday trading in the stock market.

  • High Risk: This type of stock market trading carries high levels of risk due to the short time frame involved.
  • Disciplined Approach: You must have a trading plan and stick to it to potentially reduce losses.
  • Time-Intensive: It is necessary to constantly monitor the markets in intraday trading when the market is open.
  • Transaction Costs: Carrying out multiple intraday trades may lead to higher overall transaction costs, which could reduce your net profit.
  • Volatility: Volatile markets may offer more opportunities for intraday trading as prices fluctuate more frequently.
  • Leverage: Intraday trading leverage offered by stock brokers helps you take larger positions in the market even with limited capital. For instance, Samco Securities offers up to 33x leverage for intraday trading.

Delivery Trading

Delivery trading in the stock market involves buying the shares of a company and holding them for more than one trading day. Depending on the holding period, taking delivery of stocks makes both trading and investing possible. Trading involves shorter time frames like a few days or weeks. Investing, however, spans over several months or years.

  • An Example of Delivery Trading

You perform a fundamental analysis of a company’s shares and find that they are undervalued. Expecting the price to rise over the long term, you take delivery of 100 shares of the company at Rs. 1,000 each. After around 2 years, the stock price appreciates to Rs. 3,000, and you sell your holdings for a total profit of Rs. 2,00,000.

  • Important Things to Know About Delivery Trading

Here are some crucial aspects of delivery trading that you should be aware of:

  • Lower Risk: This type of trading is generally considered less risky than intraday trading due to longer holding periods.
  • Fundamental Analysis: Focus on company financials, industry trends and economic factors in your decision-making process.
  • Dividends: Delivery trading comes with the possibility of dividend payouts if you hold stocks during record dates.
  • Lower Transaction Costs: Fewer trades mean lower overall brokerage fees and trading transaction costs.
  • Higher Capital Requirement: You need higher capital because you must make the full payment for your trade as there is no intraday leverage.

Options Trading

An options contract is a type of derivative that gives you the right to buy (in call options) or sell (in put options) the underlying asset at a predetermined price on a specific expiry date. You are not obligated to buy or sell the underlying asset (if you are the buyer of the option). However, you must pay an option premium.

  • An Example of Options Trading

You expect a company’s stock will rise above Rs. 2,500 in the next month. So, you buy a 2,500 Call option for Rs. 50 per share (lot size: 500). If the stock price reaches Rs. 2,600, the option's value increases to Rs. 100, allowing you to earn a profit of Rs. 25,000 (adjusted for the premium paid).

  • Important Things to Know About Options Trading

The key things to know about trading this type of derivative include the following:

  • Leverage: Options offer high leverage that amplifies potential gains and losses. The buyer’s risk is limited to the premium paid, but sellers face potentially unlimited risk.
  • Time Decay: Options lose value as expiry approaches. Time decay benefits sellers but works against buyers.
  • Impact of Volatility: Option prices are sensitive to volatility in the underlying asset's price. Higher volatility typically increases options premiums.
  • Options Greeks: Delta, gamma, theta and vega are Greeks that measure an option price’s sensitivity to various factors.
  • Strategy Diversity: You can use various options trading strategies (like spreads, strangles and straddles) for different market conditions.

Futures Trading

A futures contract is a type of derivative contract that allows you to buy or sell an asset at a set price on a predetermined future date. In India, futures are available for stocks, indices, commodities, currencies and interest rates. You can use futures for speculation or hedging. However, this type of trading requires a margin and involves higher leverage.

  • An Example of Futures Trading

Say you expect the Nifty 50 to rise. So, you buy one Nifty futures contract (lot size: 25) at 25,000. Assume the required margin is Rs. 62,500 (10% of contract value). If the index Nifty rises to 25,200, you gain Rs. 5,000 (25 x 200). If it falls to 24,800, you lose Rs. 5,000.

  • Important Things to Know About Futures Trading

Keep the following aspects in mind before you start trading in this type of derivative contract:

  • Leverage: Futures offer high leverage that can amplify both gains and losses. Only a fraction (margin) of the contract value is required to open a trade.
  • Mark-to-Market: Profits and losses are settled daily. This can affect margin requirements, so you must maintain sufficient balance to cover potential losses.
  • Expiry and Rollover: Futures have specific expiry dates, so your positions must be squared off or rolled over to the next contract before expiry.
  • No Ownership: Unlike delivery trading, futures trading does not involve actual ownership of the underlying asset.
  • Risk Management: Due to the high leverage involved, strict risk management and stop-loss orders are crucial in this type of trading.

Conclusion

This sums up all you need to know about the primary types of trading in the stock market. You can consider selling or buying stocks in the spot market if you have adequate capital to open the intended trade. Alternatively, you can also take positions in the stock’s futures or options market. Options trading helps you potentially profit from the stock’s price movements without the obligation of buying or selling the underlying asset. Futures online trading, on the other hand, helps you control larger positions with less capital.

That said, with the right trading tools available to you, all types of trading become more effective. Samco Securities can help you with this — thanks to the extensive range of tools and features integrated into the Samco trading app. With these features, you can view market data live, access TradingView charts free of cost, build, research and optimise your options trading strategies with Samco’s Options B.R.O and get better at futures trading online.

Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847

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