Intraday and delivery trade are two types of trading in the share market. If your investment goal is long term and you look forward to create a portfolio and manage it for considerable time say weeks, months or years, then you opt for delivery trade. If you have a short term investment goal and are looking to make maximum profit at the earliest time you can choose intraday trading. Let us look into the details of both concepts to understand in what aspects they differ and how.
Here the buying and selling of stocks takes place in one single trading day. This is otherwise called day trade. All positions are squared off in a day trade meaning trade does not result in any change of ownership. They also risk taking leverage to multiply their returns. We get to know leverage as we further understand the concept of day trade.
If you are an investor willing to take risk and expect quick returns from your investment, then intraday trading is for you. Traders should be willing to put effort tracking the stocks and set perfect time for their trades. Intraday traders are most often professional and full-time traders. Their main objective is earning profits rather than investment. Fluctuations in stock prices are taken as opportunities for capitalizing the investment. Traders use technical analysis to scan the stocks for earning good returns that can compensate the risk taken. Technical analysis is an approach to study the patterns of an investment option, by observing its trends through charts and statistics from the market data. In day trade, investors often resort to technical analysis to pick up good stocks.
This is a facility for traders to take leverage and purchase stocks with the margin money. Brokers require the traders to have a set margin, say 10 or 20 % depending on the trade value, with which they can start trading. Traders have to apply and open a margin account with the broker. This account provides the financial resources to trade for shares whose value is higher than what trader can afford. Brokers lend the money taking the stock in trade as security. This is called leverage in stock market parlance.
Essentials of intraday trading:
- Pick up right broker: Choose the one with less brokerage as the volume of transactions is high. Many times though on a given day the trader may earn a profit, it may not be a good return on investment (ROI) taking into account the brokerage incurred. The whole motive is to earn a higher ROI in a shorter span.
- Research your trade: Information support plays a great role in picking up stocks. Trader should choose large cap funds as they are highly stable and capable of meeting the pressures from demand-supply variations.
- Free intraday trading facility: Most of the brokers give the facility to sign up for free intraday trading and they charge a fixed annual fee. We should note that brokerage charges are in addition to this and are usually charged on scrips. It is ideal to sign up for this facility instead of paying fee per every transaction you make.
- Technology tools: It is a prerequisite to have your technical tools brushed up and ready. The intraday market mostly depends upon time factor. Your agility should be backed up by good tools that can support speed execution. Choose best trading terminals, gadgets, tools and apps to ensure this.
- Prepare for total loss: Most of the times our strategies and efforts may not reap a good fruit. It is only possible to prepare for a total loss when you invest minimum and exercise good control over your trades.
Tips for intraday trading:
- Choose highly liquid stocks – Liquid stocks are those which offer enough number of shares for the trader to buy or sell in large quantities, at a given point of time. And when this quick buying or selling activity doesn’t influence the stock price rapidly we call the stock to be enough liquid. While conducting day trading, seller expects a least price (ask) for a stock below which they cannot sell. Similarly buyers decide on a maximum price (bid) they are willing to pay for a stock. Ask represents supply of a stock while bid represents demand for a stock. So liquidity of a stock depends on this bid-ask spread or gap. This spread is called the de facto measure of liquidity and if it is narrow it means there is maximum number of traders interested to purchase the stocks.
For example, let us consider the ask price for a stock is ₹ 50 and the bid price for a stock is ₹ 48. The spread of ₹ 2 decides its liquidity. In percentage terms spread is calculated as 4 % (2/50*100). For this spread to close either the buyer should pay ₹ 50 or seller should settle for sale at ₹ 48. When the spread is narrow the liquidity of the stock increases. It means at a given sale or ask price there are more number of buyers to book the stock or for an offered bid price there are more number of sellers willing to sell the stock. As this spread widens the liquidity of the stock comes down making it difficult for the traders to sell it on the same day. For day traders liquidity is often referred as oxygen. They cannot make moves easily without stocks being enough liquid.
- Choose limited number of stocks: Do not complicate the trade by taking more stocks. Pick up few well performing liquid stocks and trade. More number of scrips makes it difficult to track their movements closely.
- Do enough research on stocks and market: Prepare watch lists in the selected stocks and work on their performance. Watch lists are a great tool for intraday traders which help in quick tracking. They can add ten plus stocks to their watch list and keep observing the changing trends. Though day trading is all about technical analysis, it is also important to take note of major events related to companies like dividends, mergers, bonus declaration etc.
- Take brisk action when necessary: Watch lists and other tools of technical analysis only act as guides to understand market situations. They do not guarantee that market travels according to the statistical data. At times market may behave in a total different direction than that perceived from technical data. In such cases it is necessary to close the positions and minimize losses.
- Know your rules well: Day trading inherently implies risk. You can only manage and minimize it with knowledge. This knowledge comes from a thorough understanding of basic trading rules. Investors should be smart enough not to be influenced by fear or emotional buying.
- Go slow, riskless: If you are a beginner invest a small amount until you gain a hold on the trading process. It is not uncommon for beginners to tap good profits on the very first day, but this often misleads them to put in more money with an intention to multiply profits. But we have to note that even most experienced traders encounter severe losses. There is no room for overconfidence or greed. Take it slow initially, work more towards gathering information and then act wise. There is a chance of day traders holding back their shares when they know they cannot get back their investment on that day. This is not suggested as the stocks may not be worth of holding as they are bought for a short period.
- Determine entry and target prices: Select a trading strategy, fix entry and exit prices. Stick to that without failing. Once the trading is started traders get carried away and lose the track. Unplanned decisions call for disaster in day trading.
- Book your profits when target is reached: Though traders fix the target price, when they see the chances of the stock price increasing they tend to not book profits and continue. This is very risky. If in case you are convinced that the stock price may go beyond your set target instead of blindly moving forward, adjust the stop loss price so that closing the positions, meaning closing the trade, when losses start tapping becomes easy.
- Time analysis: Experts advice the day traders against trading in the opening hours of the market. It is usually the time of the day when stocks are highly volatile. This is often quoted as a first rule for day trading. Ideally taking positions around noon have shown good results.
- Make use of stop-loss: Stop loss gives an option to close a position when the stock value is going down and exit the market without incurring further losses. Traders can request this facility from their brokers. The typical reward to risk ratio is 3:1, which means the price below which you are not ready to incur loss should be three times less than the price at which you were willing to book a profit. Example, if you wish to close at a profit when share value reaches ₹ 600, you should set and exercise a stop loss when share falls down to ₹ 200. This ₹ 200 is to be set as a stop loss price.
- Identify value area: This is to identify the stocks where high volumes of trade are recorded and find potential areas of support and resistance. Traders can observe the previous day trade, historical charts, price range and spot out value area which gives us the points where success is a most common occurrence.
Delivery trade is a long term investment option. And goal of traders is not mere profit but holding worthy investments and planning for future. It is these goals that differentiate a trader from an investor. Delivery trade is opposite of intraday trade. Here the transaction does not get completed on the same day. If you buy few shares today you don’t sell them necessarily on the same day. You take delivery of the shares and sell at a later point of time. Your demat account is credited or debited according to your share purchases or sales. This is popular and most common type of trading where investors pay full price, purchase stocks that are reflected in their demat account and sell in future.
You can take delivery of shares only to the extent of money you have in your account. In simple words you can only buy shares with the money you have.
Tips for delivery trading:
- Fundamental analysis: As investors have sufficient time in hands, it is suggested that they conduct a thorough fundamental analysis of the company. Knowing about the industry dynamics, company history and its products, services, etc all play a very important role in choosing stocks. Stocks are owned for a long time and hence we should exercise care in calculating earnings per share, P/E Ratio, dividend yield and other financial ratios to see the chances for consistent performance of the stock.
- Invest in different companies: ‘Do not put all your eggs in the same basket’ is an old saying that goes worthy even today. Choose companies with clear distinguishing factors like those who sell a different product line or some from service, some from manufacturing-related industries, so on, Economy works differently for different sectors. Some may boom while others fall. We should be able to save our soul even if we don’t earn profits.
- Patience pays: There is no scope for impulsive decisions here. When we choose to retain the stock for a certain time, temporary fluctuations should not bother. Most often investors get worried if the share price drops and sell immediately. Such hasty decisions only increase losses. No one has ever lost by waiting for the right opportunities. Long term holding can earn consistent dividends. If selling is inevitable in case of a downfall, let that be backed up by a concrete reason and not mere impulse.
- Historical data: Studying the history of the stock performance is helpful when you choose your stocks for delivery trade. Investors usually take delivery at the end of quarter results by observing the previous years’ returns.
Differences between intraday and delivery trades:
- Different analytical approach: Delivery trade requires a fundamental analysis of the shares and their companies. As the shares are owned for a long time, the financial statements of the company, profits, business decisions, etc all influence a trader’s purchase decision. Whereas in day trade, the trader uses technical analysis to make instant decisions about buying or selling.
- Time factor: Delivery trade can extend over years at times. There is no maximum time limit before which you need to sell shares. In day trade you should sell the share you buy or buy the shares you sell and square off your position without any carry forward.
- Ownership: Delivery traders immediately receive the ownership of shares on purchase whereas day traders do not have any ownership at the time of trading, as they profit from demand and supply differences and not the true share value.
- Tax calculation: As the motive of a day trader is not investment, we call his returns as profits received from speculation. They cannot be referred or categorised as capital gains. There is no real ownership or investment by the trader. He can sell shares without even owning them through short selling [In short selling the trader anticipates a near fall in the share price, borrows shares from the broker and sells at the market price. Once the price falls, he purchases them, returns the broker’s shares and takes profit out of the difference]. This is not an ideal trading approach and hence has to be shown under a different head and profits are taxable as any other profits. Loss incurred in day trading can be set off only against profits from any other speculative business. In case of absence of any other speculative business, we can carry forward the losses for the next four assessment years by declaring the losses in income tax returns (ITR). Profits out of delivery trade are shown as capital gains and taxable at a concessional rate.
- Brokerage fee: Usually delivery trades have higher brokerage rates than day trading. Day traders can enjoy free intraday facility by paying a minimum annual subscription.
- Price movement: Delivery trade takes into account the long term price movement of the stocks while intraday trade takes into account short term price fluctuations.
- Shareholding: One safety indicator for investing in a particular stock is when you find 40% of the shareholding coming from the promoters. Also foreign institutional investors holding not more than 20% offers security. Though their research is far more complex and deep than individual investor research, the company will be exposed to the global market and is prone to more volatility.
- Technical indicators: All brokerage firms conduct their research and offer certain technical indicators for easy analysis. Never miss to closely follow them as they provide reliable suggestions about taking a stock forward.
What to choose: delivery or intraday?
It is not a surprise to say most of the investors get blown away by the concept of intraday trading. It lures the traders with facilities like short selling and margin trading. It, of course, provides the greatest comfort of not carrying forward the risk to the next day even and sorting out things immediately. But risk is the master of day trade. ‘Instant profits’ is all that traders see when entering into it. But losses are camouflaged as they always are. They come as an unpleasant surprise. We should certainly question whether day trading truly represents the value of a stock. With little understanding of the concept we can easily say that it is the demand and supply for the stock that decides its price in very short period. And the company or industry performance has little to do with the stock price.
The very purpose of investment is to gain long term benefits, utilize savings in ideal way, to create alternate income and more importantly to prepare for contingencies. Day trading defies all and doesn’t match up to providing consistent returns. As we discussed earlier it is pure speculation and nothing like investment. Less do traders realise the fact the money that comes fast may go fast. This may not hold true everywhere. There are lot of day traders who consistently earn profits. But we fail to see years of their time and effort behind that. Except for few advantages like quick profits and short selling, day trading doesn’t have much to offer. While on the other hand delivery trade provides a reliable investment source from which investors can take benefits for years together in future. It offers variety of advantage like:
- Bonus shares when company is faring well. You could get double of what you already have in case company make more profits.
- Companies declare dividend per share out of their excess profits and you can enjoy dividend income at every fixed interval.
- Facility to pledge shares and avail loans from banks.
- In long run you may hit the jackpot and may earn even ten times more returns than any bank deposits.
Delivery trading is nothing but securing your future. Let it not be driven by greed for profits but guided by healthy returns. Whatsoever any trading is associated with risks and nothing comes free of effort. Investors hence should prepare their shields well before facing the battle.