Basic Principles of Trading in the Secondary Market
Always Manage Risk - Managing risk is crucial because if
you do not preserve your capital and manage your trading risk properly you won’t have money left to trade. This is by far the most important trading rule to follow!
Trading Along With the Market Trend - is an old adage on Wall Street. As the saying goes, “The Trend is your friend”
Maintain Stop-loss Order - A successful Trader must use stop-loss orders or trading alerts to protect capital, and employ a disciplined mindset so he/she can live to trade another day. One wrong trade can lost all invested fund.
Take profits, book losses - Trading is all about closing out positions. You are a trader. If you see profits you take it and then look for the next trade. If you are running losses on your positions, book the losses to live for another day. There is always a next day in trading.
Learn to handle stress: Trading is stressful. You are risking money to make money and that is a highly stressful activity. You will need to handle the stress that comes along with positions running into losses. There are many ways to handle stress and you will have to find your own way. If you cannot handle stress, stop trading, it’s not meant for you.
Difference between “INVESTOR” and “TRADER” Investors:
Investor- Individuals or entities who use their own money to purchase equity securities, which offer potential profitable returns in the form of interest, income or appreciation in value in long run.
Traders: Take leverage (Margin) on behalf of his invested fund, do the work with full capacity for earnings. Individual engaged in the trading of equity securities, or the transfer of financial assets in any financial market, either for themselves, or on behalf of someone else. They operate in the capacity of agent, hedger, arbitrageur, speculator or investor.
Major difference between Technical and Fundamental Analysis
- Uses price movement of security to predict future price movements
- Data gathered from Charts
- Time horizon is Short-term or Intra-day
- Main Function For Intraday trading
- Calculates stock value using economic factors, known as fundamentals.
- Data gathered Financial statements
- Working on the basis of EIC Framework (E-Economy, I-industry, C-Company)
- Time horizon is Long-term
- Main Function is investing in long run
Terminology of Market
Bear Market - A market in which stock prices are falling consistently.
Bull Market - A market in which the stock prices are increasing consistently.
CMP - Current Market Price
SL - Stop-loss order
TGT - Target price / Booking Price
Close Price - The final price at which the stock is traded on a given particular trading day.
Open Price - The opening price is the price at which a security first trades upon the opening of an exchange on a given trading day.
Today high Price - Today's high is the highest price at which a stock traded during the course of the day. Today's high is typically higher than the closing or opening price.
Today Low Price - Today's low is the lowest price at which a stock trades over the course of a trading day. Today's low is typically lower than the opening or closing price.
Volume - Volume is the number of shares or contracts traded in a security or an entire market during a given period of time.
Hedge - A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
Arbitrage - Arbitrage opportunities exist when the prices of similar assets are set at different levels. This opportunity allows an investor to achieve a profit with zero risk and limited funds by simply selling the asset in the overpriced market and simultaneously buying it in the cheaper market.
Speculators - are prevalent in the markets where price movements of securities are highly frequent and volatile. They play very important roles in the markets by absorbing excess risk and providing much needed liquidity in the market by buying and selling when other investors don't participate.
Diversification - Reducing the investment risk by purchasing shares of different companies operating in different sectors.
Derivatives - A security whose price is derived from one or more underlying assets. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Primary Market- The primary market is where securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time.
Secondary Market- The secondary market, also called the aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold.
Commodity Market- A commodity market is a market that trades in primary economic sector rather than manufactured products.
Intra-Day Trading - Day trading is speculation in securities, specifically buying and selling financial instruments within the same trading day
Delivery, Holding, Positional Trading- A position trader is a type of stock trader who holds a position for the long term (from months to years)
Derivative (F&O)- Futures and Options (F&O) are derivatives, meaning they are financial contracts whose value is “derived” from a spot price. Futures & Options derivatives can be found in equity market, commodity, forex and even in real estate markets. Expiry Date and Contract Cycle: Futures & Options contract have an expiry.
Definition- Having a value deriving from an underlying variable asset.
Future - contracts for assets (especially commodities or shares) bought at agreed prices but delivered and paid for later.
Option – An option is a financial derivative that represents a contract sold by one party (the option writer) to another party (the option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date
Call Option- Call options give the option to buy at certain price, so the buyer would want the stock to go up.
Put Option- Put options give the option to sell at a certain price, so the buyer would want the stock to go down.
Expiry Date- The expiration date for listed stock options in the India is normally the Last Thursday of the contract month, which is the month when the contract expires. However, when that Thursday falls on a holiday, the expiration date is on the Wednesday immediately before the last Thursday.