Difference Between Intraday and Delivery Trading
It’s simple.
Buying and selling shares on the same day is intraday trading.
And when you don’t sell your shares on the same day, your trade becomes a delivery trade.
So, in an intraday trade, both the legs of a transaction i.e. buying and selling is executed on the same day. Hence, the net holding position will be zero. In a delivery trade, only one side of the transaction i.e buying or selling is executed in one day.
Strategies differ for intraday and delivery-based trading. But it’s not rocket science if we understand these topics one at a time and compare them. And that’s what we’ll do today.
In this article, you will learn : –
1. What are Intraday Trades?
2. Advantages and Disadvantages of Intraday Trading
3. What are Delivery Trades?
4. Advantages and Disadvantages of Delivery Trading
5. How Do Intraday Trades Differ from Delivery Trade?
6. The Importance of Trading Margins
7. How Your Approach Should Differ for Intraday and Delivery Trades?
WHAT IS INTRADAY TRADING?
Intraday trades, also known as day trading, involve buying and selling a stock within a trading session, i.e. on the same day. If you do not square off your position by the end of the day, your stock can be sold automatically at the day’s closing price under certain brokerage plans.
Most traders initiate an intraday trade by setting a target price for a stock and buying it if it is trading below the target price. They then sell the stock if it reaches the target price or if they feel the stock won’t reach the target before the market closes for the day. The motive behind trading shares intraday is to make quick profits within a day.
Here’s How Intraday Trading Looks Like:
Let’s take a simple example –
The share of XYZ Ltd was trading at Rs 500/share at 10:15 AM. By 02:15 PM, the stock price had risen to Rs 550/share.
Mr. Raj is an intraday trader. He bought 1,000 shares of XYZ Ltd. for Rs 500 in the morning. When the stock price went up to Rs 550, he sold his shares and squared off his position.
By doing this, he made a profit of Rs 50 per share i.e. Rs. 50,000 profit within a few hours.
That’s intraday trading at play.
Since day traders constantly buy and sell shares, they tend to incur huge brokerage charges. Generally, to execute an intraday trade, the intraday trader has to pay a brokerage which includes Securities Transaction Tax (STT), SEBI Regulatory Fee, Transaction Charges, Stamp Duty, and GST on brokerage.
And these charges might eat up a certain percentage of your intraday profit.
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ADVANTAGES AND DISADVANTAGES OF INTRADAY TRADES
Now that we understand how intraday trading works, it’s good to know the advantages and disadvantages it offers.
intraday trading works, it’s good to know the advantages and disadvantages it offers.
ADVANTAGES OF INTRADAY TRADES
- Low Capital: Intraday traders often use margin funds when taking positions. This way, they get to place a larger trade while paying only a small amount upfront. Their broker provides the additional funds for the trade. Thus, the trader is able to bet on a bigger position than his/her capital would allow. This pushes up the potential for profit as well.
- High Liquidity: Intraday positions have to be closed within a single working day. This means the capital invested is tied up for only a few hours. The short timeframe also enables traders to book profits quickly based on price fluctuations. It also allows easy entry and exit from the trade positions.
- Low Brokerage: Brokers generally charge lower commissions on intraday trades compared to delivery trading.
- No Overnight Risk: In intraday, trades are squared off before the market closes. So, intraday traders are protected in case the markets shift after hours. This may happen, for example, following the release of adverse news. Any negative news after the market hours will not affect the intraday traders as they are already squared-off.
- Benefit of Bullish as well as Bearish Markets: Intraday traders can take advantage of both bullish (rising) or bearish (falling) markets. In a bullish market, intraday traders can buy stocks to take a long position and earn profits if the market rises. Whereas in a bearish market, intraday traders can take a short position to take advantage of falling prices and earn profits if the market falls.
DISADVANTAGES OF INTRADAY TRADES
- Small Trade Window and Risk of Loss: The time window to square off a position’s profitably is very small i.e. a day’s time. If the market moves adversely against your position during the trading day, it may lead to losses. These losses could be magnified if the exposure is high.
- Constant Monitoring: To gain as an intraday trader, one must closely track the market movements throughout the day =. This may include toggling between screens to look at different data and charts. The monitoring helps to identify the best time to enter or exit a position. But it requires some knowledge of technical analysis and can prove stressful. This is different in delivery trading where you have a long view and time-frame on a position and don’t need to closely monitor them up to the minute.
- No Corporate Benefits: Intraday traders don’t take delivery of any stocks and as a result, they do not own these assets., They also do not enjoy dividend payments on stocks and other benefits like bonus or rights issues which are available to delivery trades.
- Recommended Watch: Want higher exposure in intraday trades? Watch the below webinar recording on ‘Super Multiple for Intraday Trades’ by Mayank Paua, Senior Manager, Products:
So far so good on intraday trading.
It’s now time to look at the other side of the coin i.e. delivery trades.
Here we go…
WHAT IS DELIVERY TRADING?
In delivery trades, the stocks you buy are added to your Demat account. They remain in your possession until you decide to sell them, whether it’s for days, weeks, months, or years. You enjoy complete ownership of your stocks.
ADVANTAGES AND DISADVANTAGES OF DELIVERY TRADES
You already know the pros and cons of intraday trades. Now, let’s examine the advantages and disadvantages of delivery trading. This could help you to compare intraday trading vs delivery trading better.
ADVANTAGES OF DELIVERY TRADES
- No Time Limit: Delivery traders are free to hold on to their stocks for as long as they like. This could range anywhere from a few days to several months. If a stock did not perform well in the short term, there is no need to book losses right away. If the stock is good, the trader could hold on for the long term and sell it when the stock rises in value.
- Limited Losses: When buying shares for delivery, traders pay the full value of the shares upfront. So, if the trade does not go as planned, their loss is limited to the purchase price. In comparison, margin traders could face massive losses if their trade moves negatively because of the margin or leverage they have taken. Delivery trades, on the other hand, are done in cash so there’s nothing to lose more than what you have invested.
- Corporate benefits: By taking delivery of shares, traders become part-owners of the company. They become eligible to receive regular dividend and interest payments. They may also get other benefits such as bonus and rights issues.
DISADVANTAGES OF DELIVERY TRADES
- Low Capital: Delivery traders miss out on the benefits of margin funding. They have to pay the full sum when buying stocks. This entire amount remains blocked until the stock can be sold and limits the potential for big returns as well.
To set you up for good, here’s a quick comparison between intraday trading and delivery trading:
HOW DO INTRADAY TRADES DIFFER FROM DELIVERY TRADES?
THE IMPORTANCE OF TRADING MARGINS
A key difference between intraday and delivery-based trading lies in trading margins.
You can enhance your intraday trading earnings by using margins. These are trading loans that brokers provide their clients at a small interest. A 10x margin means that if you are investing Rs. 10,000 in an intraday trade, you can borrow Rs. 90,000 from your broker and invest a sum of Rs. 1,00,000. Meaning, you pay 10% of the amount as margin.
Margins also help increase the potential return on investment (ROI). For example, if your stock goes up by 5% in the earlier example, you will make a profit of Rs. 5,000 before paying the interest. This means, you earn a return of 50% (Rs. 10,000/Rs. 5,000) on your actual capital. But remember, margin trading can amplify losses too in a similar way. Just as profits, losses are a possibility and can erode your capital quickly.
In intraday trading, you have a potential to get more margin amounts from the broker. This can be lower than the margin available in delivery-based trades. This is because with intraday, there’s an assurance of the trade getting settled on the same day.
HOW YOUR APPROACH SHOULD DIFFER FOR INTRADAY AND DELIVERY TRADES
Different investors wear different hats and follow different strategies.
Different investors wear different hats and follow different strategies.
An investor’s approach toward markets will be different than a trader’s. And that’s why it pays to know.
how one should approach these strategies.
Here are a few points on same…
1. Trading Volumes: This is the number of times a company’s shares were bought and sold during a day. Stocks of larger and better-known companies generally have higher volumes because many people regularly buy and sell them. Experts recommend sticking to such stocks for intraday trades.
This is because you will be betting on prices changing materially in a short space of time. And therefore you need enough liquidity and volume so that you can easily sell your shares during the day when need be. If a stock has low volume, it generally becomes difficult to sell at an attractive price because there may not be enough sellers on the other side.
In contrast, long-term trades can bear the weight of low volume and liquidity because you can defer selling a stock until it reaches your target price.
2. Price levels: An ideal practice is to set price targets and stop losses for both types of trades. But they are more important for intraday trades. Since these trades are more time-sensitive, opportunities to lower losses and exit at high prices can be few. Setting price targets and stop losses help make the most of such opportunities.
With longer trades, you have the option to extend your investment period if you miss your target price. Many delivery traders may even revise their target upwards and hold the stock for longer. This isn’t possible in an intraday trade. Once you miss the price level in an intraday trade, you may not get another opportunity.
Similarly, when delivery traders are losing money, they can wait for the price to rebound in the case of a long trade. But this tends to be harder in an intraday trade.
3. Investment analysis: Intraday trades are usually based on technical indicators. These indicate a stock’s expected short-term price movements based on its historical price chart. Intraday trades can also be event-driven. For example, if a company wins a major contract, a trader may want to invest in its stock hoping that it would appreciate on the day. But neither of these approaches tells you whether a company is destined for long-term success.
With delivery-based trading and investing, experts suggest investing in companies with strong long-term prospects. This requires an in-depth analysis of the company’s business environment and internal operations. You will also need to do a lot of number crunching to understand the company’s financial situation. This is called fundamental analysis.
Recommended Watch: How to use PE Ratio and PB Ratio to find potential winning stocks –
What next?
To each his own.
Intraday trading is suitable for traders who have stomach for higher risks, losses, and timely monitoring of the market happenings. If not, it would be better to opt for delivery-based trades. The good news is you can easily convert an intraday trade into a delivery-based trade after placing the order.
Both intraday trading and delivery trading can reap you good results if you follow the simple rules of their strategies and stick to them diligently.
We will discuss how to convert intraday trades into delivery in the next section.
Until then, open your Demat Account with Kotak Securities and start your trading and investing journey today with amazing benefits!
