Question 1

What does trading on equity mean?

Accepted Answer

Trading on equity is an action wherein a company raises debt to boost returns on investments. The funds are used to procure more assets that the company hopes will offer greater returns than the interest payable on the new debt. Companies borrow capital based on their equity. A company borrowing an amount larger than its equity is referred to as 'trading on thin equity'. If the amount borrowed is lower, it is called 'trading on thick equity'.

Question 2

How do I trade in the Indian equity market?

Accepted Answer

In India, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the two major stock exchanges where you can trade in the equity market. You must hold a DEMAT and trading account to start Equity Trading on these stock exchanges.

Question 3

Do equities differ from shares?

Accepted Answer

Equities are synonymous with shares or stocks, and the terms are used interchangeably. When you invest in shares or stocks of a company, you are essentially buying an equity stake in it and becoming a part-owner of a given company. A company that registers itself on the stock exchange for trading offers its stocks or equities to the general public. Investors can choose the number of shares, and the subsequent investment amount, based on the shares available in the equity trading market.

Question 4

What does it mean when an investor short sells a stock?

Accepted Answer

An investor borrows shares of stocks from brokers that they believe will decrease in value. The investor sells the shares to the buyers who will pay the market price of those shares. Here, the investor does not own the stock. The broker will lend you the stock to short sell. You sell the borrowed stock at a higher price and buy back the same number of shares at a lower price. The difference in the price will be your profit. After selling the stock, if the price rises instead of falling, you have to square off the trade at a loss.

Question 5

How does Margin Trading work?

Accepted Answer

Margin Trading is a type of Equity Trading where investors buy more stocks than they can afford from a broker willing to lend the stocks. The stocks will act as collateral for the broker. You open a Margin Trading Facility (MTF) account with the trader and pay a minimum margin amount that the broker can use to recover any losses. Margin trading takes place within the same day. You must square off your position at the end of every session. If not, the broker has the right to square off those shares.

Question 6

What does Squaring Off mean in Equity Trading?

Accepted Answer

Traders and investors use square off, which is an Equity Trading strategy in intra-day trading, where the trader or investor buys or sells stocks and, before closing time, reverses the transaction hoping to make a profit.

Question 7

What do investors need DEMAT and trading accounts for Equity trading, and how are they different?

Accepted Answer

Per SEBI regulations, companies listed in the stock exchange no longer provide physical share certificates. As such, if you wish to invest in equities, you must open a DEMAT and trading account. While the former is a place for you to store your market investment instruments in the digital or electronic format, the latter allows you to execute your orders and is linked to your savings bank account. As such, when you buy shares, the funds are debited from your trading account, and share units are credited into your DEMAT account. Similarly, when you conduct an equity trade online to sell the shares, the DEMAT account is debited of the share units, and the funds from the sale are credited into your trading account.

Question 8

Can I conduct equity trading on both stock exchanges?

Accepted Answer

A company can list itself in both BSE and NSE or on either one out of the two. If a company is listed in BSE and NSE, the share price of BSE may differ from NSE since the number of buyers and sellers on the stock exchanges also vary.

Question 9

Why is intraday trading popular amongst seasoned investors?

Accepted Answer

In Intraday Equity Trading, investors usually opt for margin trading to buy stocks; therefore, the capital needed is lower. With smaller amounts, you can take larger positions. The broker will lend you additional funds, thereby increasing your profit potential. Brokers also charge a lower commission on intraday trading than they would on regular or delivery trading. Intraday stocks should be squared-off in a single trading day, thus, allowing traders to book profits on price fluctuations within a few hours. The capital is free for use on the same day.

Question 10

What is the role of SEBI in Equity Trading?

Accepted Answer

The Securities and Exchange Board of India (SEBI) is the regulatory body that oversees the running of the stock markets of India. SEBI formulates and approves the by-laws of stock exchanges and periodically inspects the accounting books of the BSE, NSE and other stock exchanges in the country. It also holds power to constrain companies from being listed on any of the stock exchanges and can delist already listed companies as well. Furthermore, the SEBI regulates stockbroker registrations.

Differences	Passive Investing	Active Investing
Approach	Buying and holding stocks for long term	Buying and selling for quick gains from market trends
Goals	Match market performance	Beat market trends through stock selection and timing
Management	Minimal; requires little active decision-making	Hands-on, often requires professional fund managers
Risk	Lower (diversified and less prone to market timing)	Higher (depends on individual decisions and timing)
Cost	Lower expense ratios and fees	Higher fees due to frequent orders and management
Time	Requires less time and effort to manage	Requires significant research and attention
ROI	Steady, market-average returns over time	Potential for high returns (also prone to losses)

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FAQs

What does trading on equity mean?

How do I trade in the Indian equity market?

Do equities differ from shares?

What does it mean when an investor short sells a stock?

How does Margin Trading work?