Intraday Trading vs. Delivery Trading - Understanding the Difference

Intraday Trading vs. Delivery Trading. Which one should you start with?

If you are keen to start trading in the stock markets and want to know more about intraday and delivery trading, this post is a great place to start.

There are many ways to approach trading in stocks. One of the fundamental approaches is to decide based on the idea of the 'holding period'.

You can either invest your hard-earned money for the short term or plan for the future, for example, retirement, by investing for the long term.

Holding period is the duration for which the investor holds onto a stock. To put it in simple words, it is the period between the purchase and sale of the stock by the investor.

In intraday trading, the buying and selling transactions for shares are completed on the same day. Thus, the holding in intraday trades is zero.

On the other hand, in a delivery trading strategy, buy and sell transactions are carried out on different days. Thus, the holding period is at least one day.

Let's delve deeper into these two categories of investing approaches.

Intraday Trading

Intraday trading is buying and selling a stock on the same day. Since orders are squared off on the same day, it is called intraday trading or day trading.

Using this strategy, the investors usually bank on the gains made due to the stock movement during the day. The purpose of buying is speculative rather than investing.

How To Get Started With Intraday Trading?

To start intraday trading, you need a broker account, though you don't need a DEMAT account.

• What is a DEMAT account?

Well, a DEMAT account is what you would need as an investor, to hold the shares that you buy, a bit like a bank account for stocks. The process of a DEMAT account being credited with shares is known as the delivery of shares.

Should You Trade Stocks Intraday?

There are many advantages to trading stocks intraday.

1. There is no overnight risk - meaning, if the market crashes overnight due to some news, it doesn't affect you. In that sense, there is less risk. Think about it, there is only so much that the market can move within the span of a day.
2. You can use leverage to maximize profits - The concept of leverage and margin is explained later in the post. Read that to understand it better; it can break your trading experience.
3. The capital investment required in intraday trading is less due to available leverage.
4. You can engage in Short selling, something that's possible only on an intraday time frame — an excellent strategy to profit from a stock's down move.

But then, not all is hunky dory when it comes to Intraday trading

1. It's tough to profit based on intraday moves since the moves themselves are limited and there are thousands of stocks to choose from.
2. If that is not enough, leverage can lead to more losses.
3. Lastly, regarding trading costs and taxes, the more the transactions, the more the costs, and of course, you also would need to pay short-term capital gains on your profits. Since some of the costs like brokerage are fixed, a higher capital allocation is needed to cover the costs.

Okay, I understand it all. Now, how do I execute an intraday trade?

1. You need a trading account with a broker.
2. You need to select a stock to trade. Do note, not all stocks can be traded on an intraday time frame, more about that later in the post.
3. When placing a buy or sell order for an intraday trade, you would need to use a specific order type called MIS (margin intraday square-off), doing so informs the broker that you are buying the stock for an intraday time frame and the broker's RMS (Risk management system) will auto-square-off (automatically close) the trade at a stipulated time nearer to the market close time. Typically between 15:15 to 15:25.

Execution Risks In Intraday Trading

1. Slippages - Using market orders, especially in low-liquidity stocks can cause large slippages, in other words, when there are very few buyers or sellers of a stock, you won't be able to buy or sell at the specific price that's quoting, since the profit margins on intraday trading by its very nature is small, slippages hurt even more.
2. Circuit risk - If you do not place stop loss orders it's possible that the stocks may hit the upper or lower circuit. Depending on your position there are chances that you may get stuck in that trade and may not be able to exit the same. In such situations, you would need to go through an exchange-led settlement process and you may end up paying a penalty for short delivery.

Why Am I Not Able To Buy Or Sell This Stock On Intraday Or MIS?

The two types of intraday orders are MIS and a cover order(CO). These orders provide an advantage to you as leverage is available. The risk associated with these orders is high.

For some stocks, the broker might need to restrict intraday orders. This is from either a regulatory or risk management perspective. In this scenario, you can only place a cash-and-carry (CNC) order for stocks.

Here are some of the highlighted reasons why intraday orders might be blocked so that investors do not experience heavy losses.

1. High volatility in markets
2. The liquidity or volume is low
3. There is an initial public offering (IPO) listing
4. If the margin requirement for a stock is high
5. The regulations for stock do not allow intraday trading

Delivery-Based Trading

You may sometimes hear the phrase, ‘I am taking delivery of this stock’ - but what exactly does that mean?

Contrary to intraday trading that we understood in the post earlier, delivery trading does not require you to buy or sell shares and square off positions on the same day.

In the case of delivery trading, you hold shares for two days to, as long as you desire. The holding period may go up to decades as well.

Why Is It Called Delivery Trading?

Delivery trading is called so because of the fact that the delivery of shares is taken in the DEMAT account. As discussed earlier, a DEMAT account is needed to hold the shares that you buy.

Why Opt For Delivery Trading?

1. Wealth creation - Delivery trading, unlike intraday trading, is focused on creating wealth rather than just booking profits due to stock price movements.By holding stocks for long durations you also may get bonus issues where you will be rewarded with an increased number of shares. Likewise you also become eligible for rights issues of shares where you get discounts on purchase of shares in the proportion of shareholding.
2. Lesser volatility - The stock movements need not be monitored continuously and hence the volatility decreases due to an increased holding period.
3. Corporate Benefits - When you hold on to stocks of corporations and there is any benefit related to stocks, such as the declaration of bonus shares, stock splits etc.  there is a noteworthy benefit as it increases your interest. For example, dividends give an extra return to you at the end of every year.

Does Delivery Trading Have Only Advantages?

The answer to the above question is no. When you hold onto shares in delivery trading, you have to pay the total amount upfront and hence your funds are blocked. This is a kind of opportunity loss for you as an investor.

Also, holding stocks, in the long run, does not guarantee profits, there are stocks, many stocks which can massively underperform the benchmark indices.

How Do I Execute The Delivery Trade?

1. You need a trading account and a DEMAT account to execute a delivery trade.
2. Select a stock for trading. Generally, a thorough fundamental analysis of the stock would be needed.
3. To buy or sell a stock in a delivery trade, an order type is to be selected. Selecting the NRML order will help you take the delivery of stocks in the DEMAT account.
4. A limit order can be placed to purchase or sell a stock at a specific price or a better price in the market.

Okay, I have executed the trade, now what?

Once you have executed the trade, the request goes to the exchange and your order would be fulfilled based on the available sellers. Subsequently, the stock will be credited and can be seen in the DEMAT account after T+1 days. Earlier the time required used to be T+2. You can now hold on to the stock till the stock reaches the target price you desire.

What Are The Tax Implications For A Delivery Trade?

If a stock is held for a period of more than 12 months, any gain arising from the stock is treated as a long-term capital gain. The tax treatment for the same will be 10% in excess of Rs. 1,00,000 considering it is a listed stock and securities transaction tax is paid on it.

How Does Intraday Differ From Delivery Trading?

Since we are familiar with the concepts of both techniques of trading, let us take a look at how different they are. Some points explaining delivery vs. intraday trading are as follows:

• Trading margins

Brokers often offer a large margin to intraday traders. Leverage options are available to traders. Using these options traders can buy more shares than what their balance allows. For example, if a broker offers a 4x margin, then if you have Rs. 20,000 in your account, you can buy shares up to Rs. 1,00,000. However, the broker charges a fee for offering the margin option. Delivery trades are often settled in cash. If you have a sufficient balance, you can purchase the desired number of shares. Some brokers might provide an option for margin services.

• Risk

Another controversial factor is the risk associated. Investors believe that intraday trading is riskier than delivery trading. But the intraday trades do not carry any overnight risk and delivery trades do. A plethora of factors affect the prices of stocks and can change them overnight. If a trader holds positions in stocks in the market, its volatility will work against the financial goals of the trader.

• Time

In the case of intraday trades, the buying and selling transactions have to be completed on the same day. The trader has to be vigilant in all the trades that he/she does. The broker may sell a stock automatically if the trader loses focus. On the contrary, delivery trading has no restriction in terms of time. It depends upon the investor's decision.

• Sentiment and market movements

The intraday traders generally trade in the stocks irrespective of the marketing being bearish or bullish. They might even sell earlier and buy later when the markets rise. On the other hand, delivery traders buy stocks when the market is bearish and hold on to the stocks till the market price of the stock peaks and sell the stocks to book a profit.

• Tax implications

The tax implications for both intraday and delivery trading are different. This is mainly because of the holding period. Short-term capital gains and long-term capital gains are applicable respectively.

Importance of Trading Margins

The basic concept of a trading margin is providing more resources to a trader to buy stocks. These are provided by brokers in the process of intraday trading. The gains in intraday trading can be magnified using the margins provided by brokers.

To cite an example, if your broker provides a 5x margin and you have an amount of Rs. 50,000 for trading. Your trading potential can increase up to Rs. 2,50,000 in this case. Your buying capacity has enhanced to Rs 2,50,000 in this case. So, even if you have Rs. 50,000, you can still trade up to Rs. 2,50,000. Interesting, isn’t it?

Margins are like loans provided by brokers to traders at very minimal rates. You can start trading with an initial amount and the balance amount is funded by the broker.

The prospects of getting a margin for intraday trading are higher than for delivery trading. This is because intraday trades are settled on the same day.

Leverage, on the other hand, is money borrowed to increase returns for a trade. The trading power of an investor increases with leverage.

How should your approach differ for Intraday and Delivery Trades?

The two trading techniques require different approaches to enhance profits. Let us see how the approach differs for intraday vs. long-term trades.

Summary

• You can easily opt for intraday trading or delivery trading in the market after reading this article. A DEMAT and trading account are a must. The risk, return expectation and holding period should be decided upon before investing.
• Intraday trades are executed mainly for the purpose of booking profits.
• Delivery trading is more concerned with holding stock and making a profit once the price of the stock surges. This has an investment point of view attached to it.
• Both strategies have pros and cons and you should closely evaluate the same before opting for any one strategy.

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