Stock trading is the buying and selling of share/stocks of a particular company and make profit from short-term gains & stock price fluctuations.
A stock or share is a financial instrument that represents a fraction of ownership in a company i.e when you purchase a stock of company it means you own a small piece of that company & become partner of company proportional to number of shares you bought and equally become partner of profit/loss of the company.
Example:- Lets assume an example of a cake. The cake is cut into number of small pieces and distribute among many people.The cake is like your company, and the small piece of cake is a share. Owning a share refers that you own a part of the company.
1) How we can earn money from stock trading?
In stock trading, money can be earned by buying and selling of share and make profit from short-term gains & stock price fluctuations. Price of share fluctuates based on demand and supply. if the demand of the share is greater than the supply i.e more people want to buy it and very less are willing to sell. the price of the share goes up until the demand is equal to supply. Alternatively, if the supply of the share becomes more than the demand, the price of share will fall until supply equals demand.
Lets first take a general example of our daily life to understand demand and supply.
You want to buy an ice cream but vendor has only one ice cream and there are 10 more people along with you who want to buy same ice cream. Vendor says the person who will pay me more will get the ice cream. Would you not try to pay more in order to grab your favorite ice cream. Yes, you will try at least to pay more as you don’t know how much capacity others has to pay. So here price of ice-cream will increase as Demand (11 ice-cream) is more and supply (1 ice-cream) is less.
And now think of just reverse example that there are lot of ice cream & number of ice cream vendors on the street and only you want to buy ice-cream. Now will the vendor increase the price? No not at all because if he does, you will not take ice-cream from him and go to another vendor who will give you ice-cream at less price. So here price of ice-cream will decrease as Demand (1 ice-cream) is less and supply (11 ice-cream) is more.
2) What are the reasons that affect the demand and supply of the stock ?
a) Good or bad news about a company, Economic data, Company fundamentals , corporate results and Crowd psychology, emotions (greed and fear) leads to short-term price fluctuations.
b) Also price of stock depend on perspective of buyer and seller. At a particular price, Buyers feel optimistic that stock is undervalued and it should be bought. Sellers think that stock is overvalued and it should be sold.
3) Profit can be earned in two ways in stock trading:-
a) Long position- Buy low and sell high. Buy stock when it is at low price and sell it when it reaches at high price
Example:: At 10:00 AM, You bought 50 shares of ABC company at ₹100/share .Total amount you paid in buying 50 shares = 50*100=5000rs
At 11:00 AM, you sell those 50 shares at ₹105/share. Total amount you get after selling 50 shares = 50*105=5250rs
Profit =selling price-buying price
= 5250-5000 = 250rs