Chapter 6- Share Trading Terms (Day Trading, Market & Limit Order, Stop Loss, Booking Profit & Loss)
Now that you already know some of the Basic Stock Analysis terms, we are going to move on to a few terms that are in constant use while trading on the exchange. You will hear these terms in Analysis by Experts and read about them in websites and newsletters. It is important to understand these terms to be able to be able to Trade or invest efficiently, so you might want to focus on this chapter.
Day trading is the type of trading on the Share Market where a trader enters several securities for just a fraction of a trading day. The typical day trader might hold a stock for only a few hours and may aim for a small percentage profit. Though the percentage gains that day traders attempt to capture are often miniscule, but these gains when multiplied by large volumes of hundreds (or even thousands) of shares, can turn out to be very profitable amounts.
The typical day trader usually trades on several different stocks in a single day. In contrast, the term Investor is most often used to refer to someone who buys a stock in the expectation of remaining invested in it for a long term.
Market Order & Limit Order
A Market Order is an order to buy or sell a specific number of shares at the best price available at the time the order is routed to the trading floor. Because market orders are normally executed immediately at the current market price after they have been routed to the relevant exchange, these orders are almost always filled within a very short period of time.
Stop Loss Orders
In addition to placing Stop Loss orders to limit your losses, you can also use the technique of “trailing stops” as a means of locking in your profits should the stock price increase. Referring to the example above, assume that the share price of XYZ increased to Rs.60.00. You now have an unrealised gain of Rs. 15.00 per share. You believe that the share price will go even higher so you decide not to sell the shares at his time. However, at the same time, you wish to protect or lock in a portion of your unrealised profit on these shares in the event that the share price does in fact move back down. To do this, you would cancel the existing stop loss order of Rs. 40.00 and place a new stop loss order at, say, Rs. 55.00. If the share price declines to Rs. 55.00 your position will be sold out at a gain of Rs. 10.00 per share. If the stock continues to go up, you profit even more and may decide to place another stop loss order at a higher price to lock in further gains. You can continue to “trail stop” up as the price rises as many times as you wish.
There are many views on where you should set your stop loss price levels. Though this discussion can get complex and beyond the scope of this book, a common and simple approach is to set your stop loss price between 10% to 20% below the price you paid for the stock. Remember though, that this is only a thumb rule and may not be the best range for all situations.
Booking Profit and Loss:
Unless these shares are sold, the profit or loss made due to a change in the market price is only notional since the market price can reverse in trend. So it is only when the shares are sold, that the profit or loss is actually confirmed for that trade. Selling of shares to confirm and claim profit is called “Booking Profit” and selling shares to reclaim money even at a loss is called “Booking Loss”.
Going Long and Short: