A lot of newbie traders often stress themselves about a number of issues before they start to trade. They want to know how easy it is to trade, the financial returns on trading, the perfect time to trade or exit and so on. Some of these issues tend to discourage a lot of people from trading. However, just like any other venture, trading has both its advantages and disadvantages. The list below briefly summarizes the pros and cons of trading:
Pros:
1. More opportunities
The best thing about the stock market, especially in a country like India, is that there is always an opportunity for growth. The market has been volatile for a while now due to the pandemic and there are two ways of looking at it: 1)Being fearful and playing slow/safe and 2) Cashing in on every single opportunity as they show up.
It is popularly known that when the market enters panic mode, people often trade and make decisions based on emotions rather than logic, and that happens to be the best time to get some fantastic bargains. But you will have to keep your eyes and ears open, be patient and play smart.
2. Ease and convenience
Time is of the essence when you are placing your trade in the stock market, so the promptness and ease of executing online trading portals is an advantage to several stockholders. Through online trading, you run your trade almost directly. The time spent in traditional trading transactions makes it inconvenient. It can be very frustrating and tiring, and may even end up costing you much more money than you baragained for.
3. Substantial returns
For most of the traders who begin online trading, their most important aim is to leave their job and be able to make a living off the markets. In other words, turn the market to their source of livelihood. The returns in the market are based on your risk ability, that is, how much money you actually put in, and how many of your stock trades become profitable at the end of the day. You can quickly make 20-30% in a year if you play it strategically, patiently and intelligently.
4. Derivatives don’t need capital
What are Derivatives? They are financial agreements whose worth arises from a primary asset. These assets could be shares, indices, currencies, exchange rates, commodities or the rate of interest. These financial tools help you to create profits by taking on the future cost of the primary asset. Therefore, their assessment is derived from that underlying asset.
5. Liquidity
The ‘liquidity’ of a market or financial instrument defines how much and how frequently it is traded and India has liquidity in several markets. The markets which are responsible for liquidity are termed as liquidity pools. Liquidity in a market is meant to decrease risk and offer more opportunity to purchase or sell at the chosen price for every individual.
6. Price discovery
Price discovery is the act of defining the appropriate price of security, commodity, or good and service by learning the market resources, demand, and additional factors related to dealings. Proper price discovery is subject to quantity, location, size and competitiveness of buyers and sellers, alongside the actions of the buyers and sellers.
Cons:
1. Easy losses
Several people have it at the back of their mind that trading is the easiest method of making money in the stock market, but it is also the easiest way of losing money. There is an old saying that goes thus – “the simplest way of making a small fortune in the markets is by taking a large fortune.”
2. High tax liability
A tax liability is the addition of taxation that an industry or an individual acquires based on current tax rules. Tax liabilities are gained through several means such as making money, a profit on the auction of an asset, or other extra taxable measures.
3. Circuits
The circuit breaker is a structure set up to sustain the sanity of the share market in specific situations. For example, imagine the BSE Sensex moved up by 2,110.79 points on May 18, 2009, right after the outcomes of the parliament voting were declared. The trading would have to be stopped because the markets turned out to be tremendously unstable and moved beyond normal reasoning. Circuit breakers are helpful only in equity and equity derivative markets.
5paisa is an online brokerage firm offering brokerage services for stock trading, derivatives markets, and future options on MCX, NSE and BSE.
A quick word of advice we would give to you is; do not let the disadvantages drive you away from trading because the fact is that there is a lot more to gain. A ton of people are constantly earning from stocks and you could be one of such people if only you do it the right way.