Difference between intraday BTST and positional trading
When a child goes to the candy store, he is thoroughly confused on seeing the numerous items on display. He is unable to decide, which one is the best for him. However, after the shopkeeper guides the child, he is able to choose the item that he wants.
Similarly, when a new trader enters the world of investing, he is confused with the various trading opportunities. Should he trade intraday, take delivery on his cash trades, choose the leverage of futures trading or avail the benefits of the leverage with the safety of options, the answer is difficult to choose without proper guidance. We will demystify the various availableoptions and educate the new trader on the steps he should follow, when he enters the stock markets.
Delivery trading in cash
Each newcomer should begin his journey with delivery trading in stocks. Salient features of trading in cash, taking delivery of the shares into the demat account are given below:
- When trading in cash, you place a buy order for the number of shares you want to own, depending on your account size.
- If you want to buy 500 shares of Reliance industries for the long-term and it is quoting at Rs.1000.00 per share, you will have to keep more than Rs. 5,00,000.00 in your account.
1 share of RelianceRs.1000.00
500 shares of RelianceRs.1000x500Rs. 5,00,000.00
Brokerage charged by the brokerAnywhere between 0.1 to 0.5%
Statutory government and NSE charges includeExtra
Stampduty, Service tax, STT etc.
Hence, the total amount needed to own 500 shares of Reliance for the long-term is Rs. 5,00,000.00+ other charges.
- If you are a small investor, you can even buy only a single share of reliance, which will cost your Rs.1000+other charges (as shown above).
Advantages of delivery based cash trading
- Every investment is equivalent to being a part owner of the company. The investment can be held for the long-term, a few successful investors hold on to their investments for decades. Even in India, you keep hearing stories of investors of companies like Infosys and Reliance, who have earned lakhs by holding their stock for the long-term.
- As an investor of the stock, you will earn all the benefits announced by the company’s management, like dividends, bonus issue or a stock split.
- Whenever you want to sell the stock, you can place a sell order and you will receive the money in your account, a day after you sell the shares.
- You don’t need to sit in front of the PC every day and monitor every small movement in the stock markets. Every week you can monitor the progress of your stocks and still manage your portfolio easily.
- Most rich people in the stock markets are long-term investors.
- If you find good opportunities, you can trade in the stocks by keeping it for a few months and selling the position when your profit objective is met. Even medium-term speculative trading can be done in delivery based cash trading.
Disadvantages of delivery based trading
- You will have to pay the entire amount to buy the shares of the company. A large account size is needed if you want to take up trading as a full-time profession.
- If you don’t follow the company closely, you may lose your entire capital. There are many dubious managements’ whose companies have been suspended by the exchanges.
- In a bear market, your stock investments can lose a lot of their value.
- You cannot earn money in bear markets if you are only a delivery based trader because you won’t be able to short the index or stocks, hence lose the opportunity to profit in a falling market.
Intraday (also known asday trading) in cash
Another option available to the traders is intraday trading. Many studies have shown that almost 90-95% of intraday traders lose money, still most newcomers dabble with intraday trading. The brokers are happy if you are a day trader because they tend to earn brokerage every day, which is far higher than the brokerage they earn from a long-term investor. Hence, the brokers encourage their clients to indulge in intradaytrading.
In intraday trading, the trader buys and sells the stock on the same day, whether at a profit or at a loss. He doesn’t hold the stock overnight.
If the trader utilizes the 20 times leverage option available to him, he can buy and sell 500 shares of reliance just by keeping Rs. 25,000.00 in his account.
Advantages of day trading
- You can get 10-20 times leverage while intraday trading, i.e. if you have Rs.10000.00 in your account, you will be allowed to buy shares worth Rs.1,00,000.00 or Rs.2,00,000.00.
- As the day trader doesn’t hold stocks overnight, he is unaffected by the news-based events, which affect the stock market opening. Such events tend to cause large drops in the stocks, however, as the day trader closes his position before the end of the day, he is not at any risk, unlike the trader who takes delivery and holds the stock.
- Instead of being stuck with a single stock, the day trader can opt to trade in the stock, which is in action on that particular day. Ideally, he can keep rotating his profits higher, however, in reality, it is easier said than done.
- The brokerage charged for intraday trades is lesser, can be from Rs.15 per trade (irrespective of the number of shares you trade) with a discount broker to 0.05% with an offline broker.
- As the day trader doesn’t hold any positions overnight, he is not worried about bear or bull markets. He can sleep in peace, without worrying about any news based event announced after trading hours.
Disadvantages of day trading
- The trader has to be attentive every second of the trading day, which makes intraday trading a very strenuous exercise.
- The trader develops a gambling tendency, which can be dangerous. In order to earn back the lost amount, many traders keep committing repeated mistakes.
- Leverage is a double-edged sword. If you avail the facilities of high leverage, any adverse movement in the stock can wipe off your account.
- Day traders are not eligible for dividend payouts as they don’t hold any stock after trading hours.
- In strong bull or bear markets, the stocks open with a large gap up or a gap down. Most of the stocks movement for the day is completed in the first few minutes of the trading day, post which, the stocks enter a trading range, digesting the gains. In such markets, the intraday traders tend to lose out on excellent opportunities to earn profits.
Buy Today Sell Tomorrow trading
Another method of trading, which is popular among a few traders is BTST trading. Here, the traders keep the stocks overnight, however, they don’t take a delivery. They sell the stocks by the next day evening. This neither comes under day trading nor delivery trading, it’s in between.
Advantages of BTST trading
- A few intraday traders prefer to hold their positions overnight for a day when the markets are very strong. Such traders avail the benefits of gap up openings without taking delivery of the stock.
- Many brokers offer a certain amount of leverage for BTST trading, however, the leverage is much lesser than the intraday leverage.
- BTST traders earn large profits in strong bull markets and in stocks, which have a history of gap up openings.
Disadvantages of BTST trading
- Though the stock is held overnight to earn more profits, any news in the evening can turn the profit into a large loss. Many stocks open gapdown 10-20% due to adverse news. With leverage, such a large move can wipe your account.
- The broker charges you the same brokerage as for delivery based trades.
- Sometimes, if there is a problem in delivery or paying the amount, or if bank holidays come in between, the BTST trades go into auction, leading to losses. This small risk is always involved with BTST trading.
- Many brokerages offer BTST only on a select few stocks, you can’t do BTST trading with all stocks.
Though each type of trading has its own followers, it is advisable that the newcomers should take it one step at a time.
- The first step that a newcomer should practice is delivery based trading. If the stock continues to perform well, he can keep holding the stock. However, if the trader has a short-term approach too, he is better off with delivery trades.
- Once the newcomer is able to continuously profit from delivery trades, he can diversify his trading approach. He can enter into speculative short-term trades, gradually reducing the holding time of the stocks. Starting with holding the stocks for a few weeks, the trader can reduce his holding time to a few days, i.e., practice swing trading.
- After achieving expertise in swing trading, he can start BTST trading.
- With complete mastery over BTST trading, the traders should finally try out their hand at intraday trading, if they want to.
- Looking at the poor record of day traders and the intense competition they face from ever increasing use of automatic trading by computers, it is best if newcomers stick to long-term investing. After all, some of the world’s best traders are long-term investors.
Tags: Cash trading, Intraday and BTST trading