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Chapter 9.2:Difference Between Intraday Trading and Delivery Trading

- Buying and selling shares during a single trading day is intraday trading

- When you do not square off your position, your trade becomes a delivery trade

- Strategies differ for intraday and delivery-based trading

It may not be easy to really understand intraday trading without seeing how it contrasts with delivery-based trading. Let’s pit the two trading options and see how they compare.

What are intraday trades?

These trades involve buying and selling a stock within a trading session, i.e. on the same day. If you do not square your position by the end of the day, your stock can be sold automatically at the day’s closing price under certain brokerage plans. So check with your broker about automatic squaring off.

Most traders initiate an intraday trade by setting a price target for a stock and buying it if it is trading below your target; they then sell the stock when it reaches the target. Or, if they feel the stock will not reach the target before the market closes for the day, the intraday traders sell it at the best price possible.

What are delivery trades?

In delivery trades, the stocks you buy are added to your demat account. They remain in your possession until you decide to sell them, which can be in days, weeks, months or years. You enjoy complete ownership of your stocks.

How do intraday trades differ from delivery trades?

The importance of trading margins

Another 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 Rs.1,00,000. Meaning, you pay 10% of the amount as margin. Kotak Securities offers multiples as high as 50x.Click here to know more

Margins 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%. But remember, margin trading can amplify losses too in a similar way.

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

Your approach to intraday trading should be very different from delivery trades. Here is how:

  1. 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 high volumes because 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. This can be hard in the absence of high volumes. Long-term trades depend less on volatility because you can defer selling a stock until it reaches your target price. Experts also use trading volumes as a key intraday trade indicator.Click here to know more.

  2. 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 limited. Setting price targets and stop losses help make the most of such opportunities. Click here for more such intraday trading knowledge.

    With longer trades, you have the option to extend your investment period if you miss your target price. Many traders may even revise their target upwards and hold the stock for longer to achieve it. 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 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. 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. Click here to learn how to analyse a company’s fundamentals.

What next?

Intraday trading is suitable for traders who can take risks and bear deep losses. If not, it could be better to opt for delivery-based trades. That said, if you want to try intraday trading, click here to open a brokerage-free intraday trading account. The good news is you can easily convert an intraday trade into a delivery-based trade after placing the order. We will discuss [how to convert to delivery] in the next section.

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