Difference Between Intraday Trading and Delivery-Based Trading: Which one should you prefer?
Intraday Trading Vs Delivery-Based Trading: An Overview
Intraday trading involves the buying and selling of shares on the same day. However, the deal turns into a delivery trade if the investor doesn't sell the shares on the same day. Therefore, in an intraday trade, the purchasing and selling halves of a transaction are carried out on the same day. The net holding position will thus be zero. In a delivery trade, just the purchasing or selling portion of the deal is completed in a single day. Intraday and delivery trading are different strategies that investors apply to their trading techniques in order to improve their performance. The article helps readers understand the meaning and function of, as well as the difference between intraday and delivery trading.
What is Intraday Trading?
Purchasing and selling stocks on the same trading day is known as intraday trading. In this case, stocks are bought to generate gains by capitalizing on stock index movement rather than as an investment. In order to profit from stock trading, the price changes of the shares are therefore tracked.
For intraday trading, a trading account is set up online. One must clarify that the orders are for intraday trading while engaging in intraday trading. It is known as intraday trading also since the orders are squared off before the conclusion of the trading day.
In an effort to profit from momentary price variations, traders closely monitor intraday price movements using real-time charts. When trading during the market day, short-term traders often employ intraday charts that are one, five, fifteen, thirty, and sixty minutes long. For high-speed trading, intraday scalping often employs one- and five-minute charts. Other intraday trading tactics might make use of 30 and 60-minute charts for trades with several-hour hold durations. Scalping is a method that involves making numerous trades each day in the hopes of making money off of minute changes in a stock's price. Even though they may hold their positions for a longer time, intraday traders nevertheless take significant risks.
Example of Intraday Trading
Let us take an example to understand the concept of intraday trading. Suppose, at 10:15 AM, the share price of Abc Ltd was ₹ 200 per share. The stock price increased to ₹ 220 per share by 02:15 PM. Mr. Raj trades during the day. He began the day by purchasing 1,000 shares of Abc Ltd. for ₹ 200 per share. When the stock price moved up to ₹ 220, squared off his position by selling all the shares he held of Abc Ltd. By doing this, he quickly earned ₹ 20,000 in profit or ₹ 20 per share. This example demonstrates how intraday trading functions.
Day traders sometimes pay high brokerage fees since they frequently acquire and sell shares. In general, an intraday trader must pay a brokerage fee, which includes Securities Transaction Tax (STT), SEBI Regulatory Fee, and other fees, in order to complete an intraday trade. Additionally, a certain portion of an investor’s intraday profit may be eaten away by these fees.
|Little capital investment is required as payments can be made in small margins||No long-term capital investment|
|Capital can be leveraged to earn maximum profits||The use of leverage can lead to more losses|
|Eliminates the overnight risk of stocks||Requires constant attention|
What is a Delivery Trade?
One of the methods to trade in the stock market is through equity delivery, often known as delivery-based trading. In an equity delivery, one purchases some shares and keeps them in their Demat account for some time. In delivery trading, once the shares have been delivered to the buyer, they are free to keep them for however long they like. The stocks the investor purchases are all theirs, which means they can hold onto them until the right time to sell them for a healthy profit.
Delivery trading takes place in an investor's trading account; it involves trading in shares that are already in a Demat account or that will be credited to one. In delivery trading, traders are required to cover all margin costs and make sure that the exchange is paid at the absolute latest by the first part of T+1. The position may be squared off and the loss, if any, will be deducted from the client account if the payment for the delivery transaction is not made by the following morning.
Example of a Delivery Trade
Let us take an example to understand how Delivery Trading works. Let’s say, Mr. Akash, a long-term stock market investor, identifies that particular stock, say ABC Ltd., is undervalued. Hence they anticipate the price of the stock to go up in the future. He purchased 10000 shares of the company at ₹ 100 per share on 16 August 2022. Now, he does not amend or sell his trade, until the price of the stock hits a particular numerical target or a time-bound deadline. The price of the stock appreciates to ₹ 135 in the next 4 months. Mr. Akash sells his shares for the company as his target is met and his trade turns out to be successful.
In this kind of trade, the investor assumes ownership of the particular shares that he/ she purchases, and the same is stored in his/ her Demat account. The shares are transferred to the new owner once the shares are sold to someone.
|No time limit to selling stocks||No upfront payment. An investor can lose good opportunities due to a lack of funds|
|Provides easy bonus earnings (dividend, bonus issues, rights issues)|
|Helps in significantly increasing profits of the investor|
|No risk of short selling|
Difference Between Intraday Trading and Delivery-Based Trading
Now that we are familiar with what is intraday and delivery, let’s explore the points of differentiation between the two. Points highlighting intraday vs delivery are mentioned below:
- Type of Share: There are typically two categories of stocks: liquid and illiquid. Since the volume of liquid equities is significantly larger than that of illiquid stocks, intraday traders often favor them. You may purchase and sell these shares whenever you want because of the large volume. Delivery traders, however, have the option of investing in both liquid and illiquid shares. For instance, some investors put money into penny stocks in the hopes that the price would rise and they will make money.
- Trading Margin: Brokers frequently provide high leverage or margin to intraday traders. They can purchase more shares using the leverage option than what the account balance allows. For instance, if the broker offers a 4x margin and your account balance is INR 5,000, you can purchase shares worth INR 20,000. However, the lender could charge a fee for offering the margin option. Delivery trades, on the other hand, are often settled in cash. Only if your account has a sufficient clean balance to cover the transaction may you purchase shares. However, some brokers provide margin services for deals involving deliveries.
- Risk Involved: At this stage, the argument of delivery vs intraday reaches a problematic degree. Compared to delivery trading, some investors believe intraday trading to be riskier. Contrary to delivery deals, intraday equities don't carry overnight risks. Multiple variables that are under or outside of the company's control might affect stock prices. Additionally, if any bad news breaks after the market closes, the stock may fall the next day. If you trade long-term deliveries, the short-term volatility may not have a big impact on you. However, if you engage in short-term positional trading, the volatility could work against your financial goals.
- Market Sentiment: Intraday traders purchase and sell equities on the same day, in contrast to delivery traders. As a result, they may trade in both bullish and negative markets. They purchase first and sell later in a bull market. Additionally, they sell earlier and purchase later when the market is bearish. Delivery traders, on the other hand, typically spot chances in a down market and hang onto them until the stock value rises. In a bull market, they sell their holdings.
- Time Period: Trading intraday has a time limit. On the same day, the trader must both purchase and sell. The broker may take a charge to sell automatically if they become unfocused. Contrarily, delivery deals have no time restriction. Depending on the investor’s time frame for investing, they can sell them at any moment.
Importance of Trade Margins
It can be observed a key difference between intraday and trading margins lies in trading margins.
Intraday earnings can be increased with the help of these margins. Margins are trading loans that brokers provide their clients at a nominal rate. For example, there is a 10x margin i.e., if you are investing INR 10,000 in intraday trade, you can borrow INR 90,000 from your broker at INR 1,00,000.
These margins also help in increasing potential return on investment. You can get more margin from brokers in intraday trading as compared to delivery-based trading as there is an assurance of trading getting settled on the same day.
How should your approach differ?
A few pointers on how you should approach intraday and delivery-based trading are mentioned below
- Trading Volumes: Trading volume is defined as the number of times a particular company's shares were sold and bought during a day. Stocks of larger and well-known companies have higher trading volumes. For intraday, it is best to stick to such stocks. You will have enough liquidity to sell shares whenever you wish to. On the other hand, for long-term trades, you can bear low trading volume shares and not sell the stock until the target price is reached.
- Price Levels: It is best to set price targets. Since intraday trades are time-sensitive and opportunities to lower prices can be thin, it is best to set target prices to make the most of the situation. You can however have the option to extend your investment period with longer trades. Delivery trades help in revising targets and holding the stock for a longer time.
- Investment analysis: Intraday trades are based on technical indicators which help in indicating expected short time price movements. But this analysis does not determine the long-term success of the company. On the other hand with delivery trading, experts suggest investing in long-term prospects. In such scenarios, fundamental analysis helps in providing the desired analysis.
Intraday or delivery which is better?
Although there is no concrete answer to intraday vs delivery which is better, both have their own pros and cons. Delivery trading demands full amounts for every transaction, whereas intraday trading allows for smaller capital accounts and margin payments. If a trader can assess and predict the value of shares at brief, discrete periods, intraday trading is a solid concept.
Can an intraday order be converted to delivery trade?
To change an intraday order into a delivery order, there are no fees. Brokers offer the investors to convert their intraday orders into delivery trades. The only catch is, that the investor must have enough money in their trading account to cover 100% of the transaction value as an upfront margin in the case of a purchase trade in order to convert an intraday order to a delivery order.
Can an investor trade in illiquid stock on intraday?
Traders choose illiquid equities, which they, therefore, find challenging to sell. Due to a shortage of consumers, this may prevent merchants from selling their products at the planned price. A trader will not be compelled to take delivery of the stocks if he or she is unable to locate a buyer before the market squares off. However, after that, things could become confusing, leading to traders making intraday trading errors and suffering big losses. The investor can be responsible for penalty fees, and some stockbrokers may charge for the auto square-off service.
Which one should you prefer?
According to market experts, investment in the long-term helps in providing better rewards. It is a useful investment strategy for those who do not have time to review portfolios on a daily basis. But those who can read chart patterns and are strong in technical analysis can definitely invest in intraday investing. At the end of the day, it is essential to understand your ground and fundamentals to make a profit and avoid losses.