IntraDay trading is attractive – it allows you to trade on margin, take on leverage, and zoom in on your profits. If you have trouble understanding the concepts mentioned or find it tough to differentiate IntraDay trading from Delivery Trading – this article is for you.
Branches under Trading
Under the umbrella of “trading”, there are 2 main branches. There is Delivery Trading, and there is IntraDay Trading.
Most trades are placed on a Delivery trade basis. When such trades are placed, the order gets executed(transfer of shares to Demat account) on a T+1 basis(Trade + 24 hours).
In an IntraDay trade, the order gets placed and executed(“squared-off”) on the same day. The term “squared-off” means that if I place an IntraDay order on 24/09 at 1:26 pm, it will be executed by market close, i.e. by 3:30 pm.
As per a study done by Vantage Point Trading, only 4.5% of the 2000 IntraDay traders turned out to be successful. To add fuel to the fire, “If you put in little time and practice into your trading, your success rate is close to 0%. The 4.5% stat is for people who give it a valiant effort, put in time and practice, and start with a reasonable amount of capital.”
Complete understanding of IntraDay is paramount. Below is a ‘guide’ to help you understand IntraDay.
IntraDay – Meaning and Terms.
MIS – Margin Intraday Square Off
CO – Cover Order
Margin % – Price you need to pay for the stock
Leverage – Limit of your bet
The margin and leverage are set by brokers, i.e. they may differ depending on your broker.
Aside from this, you also need to pay brokerage commissions(even if you use a discount brokerage like Zerodha) for IntraDay trading.
Margin – described in % terms, denotes the amount you need to pay to buy one company stock. For example: if a stock trades at $100 and the margin is 20%, you effectively need to pay only $20 to buy one stock.
A low amount of capital is required to start trading significant amounts in intraday trading.
|IntraDay Trading||Delivery Trading|
|Capital – $1,00,000;|
Stock Price – $2000;
Margin – 20%;
|Capital – $1,00,000|
Stock Price – $2000;
Margin – (absent)
|Number of stocks – 250||Number of stocks – 50|
It is due to affordability that IntraDay is preferred.
Leverage – Simply stated, leverage is 1/margin. If the margin is 20%, then leverage will be 5X. Leverage states the maximum exposure you can have concerning your invested capital.
A leverage of 5X states that $1,00,000 can buy you $5,00,000 worth of shares.
How IntraDay Works
The first question after reading the aforementioned information should be, “how and more importantly, why?”, how are you getting a stock at an 80% discount but even more importantly, why is anybody giving you a deal of this sort where you can make more gains concerning your capital.
How: The reason is that since the transaction gets completed on a T+1 basis, there is a 24-hour window where the stocks are with your broker. When you place an order, the broker essentially lends you the stocks for a day. The stocks get back with the broker by the end of the day, and he gets paid for his services.
Why: There are no free lunches; the broker does not do this because of their benevolence but because overall, at the end of the day, they take a fat amount home in the form of commissions from repeated buying and selling.
You place an IntraDay order today with a total capital of $100 on stock ABC worth $100/each.
Imagine the margin to be 20%.
The leverage would then be 5.
A single stock is available to you at $20, and therefore, you buy 5 stocks. The price rose by 1% to $101. You square off the position.
You bought stocks worth $500, and now their value is $505. The broker takes away $400(that he lent you) + commissions. You make a $5 profit, i.e. a 5% gain on your total investment on selling this.[which would have been just 1% if it were a delivery trade]
The example here is simplified; this does not include duties, taxes, and brokerage. If you wish to find out more about it, we would recommend the Zerodha Brokerage Calculator.
Should you do IntraDay trading?
Everyone starts somewhere but it is important to not be foolish.
IntraDay trading increases your profits but can also zoom your losses. If you decide to use IntraDay – be aware of potential losses. Only trade when the probability is in your favour and when the risk-to-reward is optimal.
If you can take losses and strive forward, then IntraDay might be for you.