Basics of stock market 10: Types of Traders/Investors in the stock market
Now you have a better understating of the 3 Types of accounts you need to start trading. Let's understand the types of traders and investors in our stock market.
As of my writing, there are 1.9 Cr traders/investors in India. That is somewhere close to 2% of the population. If you compare this with other countries, China is having 10% and The United States is having almost 27%. That is 27 people out of 100 people engaged in the stock market through one form or the other. Not all the people who are engaged in the stock market are traders or investors. If you take the big bull, Rakesh Junjunwala, he is pictured as the Warren Buffet of India. If you have no idea who Warren Buffet is, he was the world's richest person back in 2012-2014. He is an Investor and has been an investor for his whole life.
Different people trade with different styles with their own techniques which they have learned and mastered throughout their career in the stock market. Their style will also determine the kind of capital they might be using and the risk they will be taking.
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Let’s learn about the types of Traders there are out there, most of whom do this day in and day out, the bread and butter for their day. They look for quick and short trades and often get out of the trade as quickly as possible. The time they hold a share will vary from few minutes to few days to even a few weeks. They are on a constant alert and on the lookout for opportunities whenever their risk appetite works.
This type of trader usually gets into a trade and exits out from the trade on the same day. He doesn’t hold onto his position to carry forward the next day. He doesn’t take risks keeping his position overnight. There can be cases of any news overnight and the stock can fluctuate based on that. Here the trader utilizes the advantage of leverage. Leverage is an option given by the broker to trade 4-5 times your capital. With a minimum amount, the trader can buy a huge number of shares. The trick here is to calculate your risk appetite and plan the trade accordingly.
The psychology behind taking these trades will be fast in fast out. Consider yourself driving a formula 1 car and think about the number of decisions you will have to make every second. This will be the mindset of a Day trader.
These traders usually trade equity shares, where they buy large quantities. For example, if a trader is trading in TCS, he will buy 100 shares of TCS priced at 2850. Thus, the capital will be 2,80,500 and he will mostly keep the position for few minutes. Suppose the price goes up by 10 rupees in the next 5 minutes, he will exit out and take 1000 rupees (10 rupees*100 shares) as profit and close his position. The trader might take multiple trades like this on different shares. He usually takes 5-6 trades in a day.
This trader is also a day trader but he gets in and gets out very quickly. Even quicker than a normal day trader. The trick here is to scalp or multiply the opportunities on a trade. He closes his position within minutes, normally in seconds. Think about driving a Formula 1, in this case, he will have to think like a formula 1 engine. That speed and accuracy are required to excel in this trade.
This trader would have to ensure good capital in his account even though he is taking leverage and should have the mental processing power of a formula 1 engine.
He would normally use the advantage of leverage and trade in huge quantities. Let’s take the above TCS example. He would get into the trade at 9.25 am buying 10,000 shares of TCS at a price of 2850. By 9.26 am, the price has gone up to 2850.1 and he will close his position and come out of the trade. His profit will be 1000 rupees (0.1 rupees*10,000 shares). If you compare the day trader with Scalper, a scalper is highly risk-averse, which means he doesn’t want to take any risk at all keeping his position open. He usually takes 6-8 trades in a day.
There is one more way this trader does scalping, increasing his position. If the stock price is going in his favor, he starts to increase his position thereby taking the advantage of the trend in his favor. Remember, the trend is your friend, and never trade against the trend!