Chapter 6- Share Trading Terms (Day Trading, Market & Limit Order, Stop Loss, Booking Profit & Loss)

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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

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

An order to a broker to buy a specified quantity of a share at or below a specified price, or to sell it at or above a specified price (called the limit price) is called a Limit Order. This ensures that a person will never pay more for the stock than whatever price is set as his/her limit. This is one of the two most common types of orders, the other being a market 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

A “Stop Loss Order” is an order to sell a stock if it hits a certain price below the Current Market Price (CMP). For example, if we buy 1000 shares of a company ABC for Rs. 45 each, obviously the purchase was made in the expectation that the stock price would go higher. However it would be prudent to set a Stop Loss order to safeguard against too much loss in case the stock suddenly slides down. We could then put a stop loss order on stock ABC at say Rs. 40 so that the shares are automatically put on the Selling queue if the Market Price touches Rs. 40/- This is an example of using Stop Loss to minimize losses.

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:

Booking Profit and Loss are Investment terms and not trading terms. While Day Trading, the shares are bought and sold off within the same day. However, for a medium or long-term investor, the stocks are often at a different price than the price they purchased it for. 

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:

Going Long is the investor’s purchase of a security for Investment or Trading with the expectation that the price will rise resulting in a Profit once the security is sold. Such an option is called a Long Option. Selling Stock that an Investor does not own by borrowing Shares from a broker is called Going Short. The assumption in Going Short is that the price of that security will fall. The investor then buys (covers the short) the shares at a lower price than what they were sold for, recognizing the difference as a profit.

Categories: Share Trading Terms

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