If you are new to the world of stock market trading, there might be some terms that you are unfamiliar with. Terms like “intraday” and “delivery” are thrown around a lot, among veteran traders and investors alike. In short, these are two types of trade. When deciding what type of trade you want to get into, it is important to consider a plethora of factors like your overall financial plan, the level of profits you wish to make and in what time period, the risk you are willing to undertake to do so and so on.
Generally, there are two main ways to trade – delivery or intraday trading. Let’s look at both a bit in detail!
Intraday Trading
Intraday trading involves buying and selling off stocks within the space of one day, or more accurately, a single trading session. Your orders are squared off before the stock market closes for the day. This does not happen in delivery trades.
Delivery Trading
As the term suggests, a delivery trade is one in which an trader or investor attempts to take physical delivery of the stocks by holding on to them overnight. Typically, it will take you t+2 days to receive the actual ‘delivery’ of the stocks in your demat; nevertheless, any trading position where you hold on to the stock overnight is a delivery trade. You hold the stocks you purchase for any period of time ranging from two days to forever. Your positions are not squared off on the same day.
Key Differentiator
The major difference between these is clearly the time period. In an intraday trade, the main motive is profit making rather than investment. Trades are made based on the movement of the individual stock, benchmark indices, external news related to the company or industry, geopolitical movements, announcement of quarterly results, and so on. In delivery trades, it is the opposite, since you are picking a longer-term horizon that ranges beyond a single trading session.
In intraday, you do not gain ownership of the stocks while you do in delivery (if you hold it for (t+2 days). In the former, price movements are the key factor to be observed and, in the latter, returns matter more than the price movements.
Which trading style is suitable for you?
Now, you might be wondering about what type of trading is the best suitable for you. But before you decide upon which technique of trade you would like to get into, it is pertinent to understand the pros and cons of each technique. This will help you choose the technique most appropriate for you.
Advantages of Intraday Trading
- One of the major advantages of intraday trading is that the capital requirement is lower when compared with delivery trading since it allows traders to buy shares in margins rather than having them pay the entire amount.
- Alongside this, their investments are more liquid. Their money is locked in for only a couple hours a day and their positions are closed off at the end of the trading day, so this technique ensures more liquidity than delivery trading.
- Intraday traders are able to catch trends early in the game. Their constant monitoring of the market helps them with this.
- This also eliminates chances of suffering through overnight risks.
- Moreover, the brokerage charges for this are considerably low.
- One other major advantage is that you have the ability to short sell shares. This means that you can sell shares that you do not own. Here, you borrow stocks from the broker, sell them to the market at a certain price and later, when the price of the stock falls, you return the stocks to the broker at the lower rate while pocketing the difference. This way, you are able to make profits even when the prices of stocks are falling.
- Usually, intraday trading requires a fair amount of technical knowledge which equips traders to use tools which help in predicting short term price movements and such. So, those who possess technical knowledge and wish to make quick profits in a very short amount of time opt for intraday trading.
Pitfalls of Intraday Trading
However, it is not all good. Intraday trading has its own share of disadvantages.
- For one, closing the positions at the day’s end considerably increases the chances of suffering losses as the trader cannot hold on to the stocks to the next trading day.
- Intraday traders do not get to enjoy additional income in the form of dividends, bonus and rights issues.
- Another negative aspect is the time-consuming nature of intraday trading. It is like a full-time job as it requires the traders to continuously monitor the market to immediately observe changes in trends. This might actually end up affecting the psychological health of the traders as the pressure and stress is quite high.
Delivery trades are also a good option as they prove to be a great avenue for long term investments. Let’s compare their advantages and disadvantages!
Advantages of Intraday Trading
- Traders can hold their positions for any duration of time as they please, so even if they suffer losses in the short term, they do not have to necessarily bear it.
- There is a significantly lesser amount of risk in this type of trading. It is also not as time consuming as intraday trading and definitely not as stressful. Moreover, investors enjoy additional income in the form of dividends, bonus and rights issues and more perks offered by the company, if they hold on to the investment strategically before the announcements’ cut-off dates and so on.
Pitfalls of Delivery Trading
- The capital required for delivery trading is considerably higher.
- The liquidity of investment is also particularly low since the funds are blocked due to the longer trading period.
- Also, the brokerage charges are higher as compared to intraday charges.
- Traders also face the problem of overnight risks. Even a little bit of negativity surrounding a stock is capable of devaluing the stock by a lot, making it susceptible to opening with a significant gap down which leaves traders few moves to act on. This makes traders more vulnerable.
- Those with fundamental knowledge about the stock can opt for delivery trading, if the positional trade spans a few days or weeks.
- Delivery trades can also be converted into long-term investments if the long-term trend seems favourable. When people believe that a company has potential and that it could give high returns in the future, they purchase stocks and hold them to reap their benefits at a later stage. These types of conclusions can be made by looking at a firm’s financial statements and analyse their earnings per share, liquidity ratio and more.
For intraday, you will need an online account with a broker (like Zerodha) and you do not need a demat account since you do not actually own the shares. But, for delivery trades, a demat account is a must as that is where your shares will be stored while you hold them.
Conclusion
At the end of the day, the ultimate choice must be made based on the risk aptitude, investment capability, the time available for trading, and risk per share of the individual. The type of trading you choose must also completely align with your overall investment plan. Play to your strengths and see to it that no decisions are made without having a solid plan in place.
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