Pros and Cons of Trading

Many first-time traders often wonder about a number issues before they start to trade. People want to know about the ease of trading and compare its returns with other investment classes. Trading has both its advantages and disadvantages. The following list summarizes the benefits and downsides of trading:

Pros:

1. Easy and convenient

   Time is of the essence when you trade stocks in the stock market, so the promptness of executing online trading portals is an advantage to several stockholders. Through online trading, you can run a trade almost directly. The time involved in traditional trading transactions is an inconvenience and can even end up causing costing you a lot of money.

2. Good returns

   For most of the people who begin online trading, the important objective is to leave their job and be able to make a living off the markets. The returns hinge on your risk ability, how much money you put in, and how many of your stock trades become profitable. You can easily make 18-30% in a year if you play it strategically and intelligently.

3. Derivatives don't require capital

   Derivatives are financial agreements; their worth arises from a primary asset. These could be shares, indices, commodities, currencies, exchange rates, or the rate of interest. These financial tools aid you to create profits by taking on the future cost of the primary asset. Hence, their assessment is derived from that underlying asset.

4. Liquidity

   The word ‘liquidity' of a market or financial instrument defines how much and how frequently it is traded. The markets that are responsible for liquidity are termed as liquidity pools. Liquidity in a market decreases risk & offers more opportunity to purchase or vend at the chosen price for every individual.

5. Price discovery

Price discovery denotes the act of defining the appropriate price of security, commodity, or good/service by learning the market resources, demand, and additional factors related to dealings. Proper price discovery is also subject to quantity, size, location, and competitiveness of buyers and sellers, along with the actions of the buyers and sellers.

Cons:

1. Easy losses

   A lot of people think that trading is the simplest method of making money in the stock market, but it is also the easiest way of losing money. There is an old saying: "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 sum of taxation that industry or an individual acquires based on current tax rules. A chargeable event activates a tax liability calculation. Tax liabilities are gained due to making money, a profit on the auction of an asset, or extra taxable measures.

3. Circuits

The circuit breaker is a structure to sustain the sanity of the share market in specific situations. Let's say, the BSE Sensex moved up by 2,110.79 points on May 18, 2009, right after the Parliament voting outcomes were declared. The trading had to be stopped because the markets turned out to be tremendously unstable and moved beyond reasoning. Circuit breakers are useful only in equity and equity derivative markets.

5paisa is an online lowest brokerage firm offering brokerage services for stock trading, future and options, derivatives markets, on NSE, BSE, and MCX.