How Exactly does Intraday Trading Work?
Once an individual has identified as an intraday trader, they are entitled to higher leverage. For example, with a margin of Rs 10000 an individual can take an open position to an extent of Rs. 80,000, that is defined by a 12.5% margin or 8 times more opportunities. Once you start buying or selling intraday trading shares in the morning it has to be closed out on the same day. With these opportunities, it becomes important that a broker set-up a Risk Management System (RMS) which will close out all the open intraday shares transactions by 3 PM and 3.15 PM. But that is not mandatory, it depends on the trader to trader when they want to close the intraday trade.
The 5 Step Process of Intraday Trading
- Once a trader places an order on intraday trading shares, the trader has to clearly define that it is an intraday trade. Only then, the broker will get a chance to get the higher leverage that applies to intraday trading. It is the responsibility of the trader to ensure that the trade is initiated and closed on the same day. While the broker will run the RMS system to close out any open order after 3 PM, there is a chance they the order remains open even after 3 PM. This causes you to lose your amount.
- When an intraday trader places the order, it can be divided into a cover order or a bracket order. The cover order includes the stop-loss defined at the time order itself. Also, a trader is allowed to place a bracket order which entails putting a stop loss and profit target at the same time of placing the order. In case the stop loss or profit target is triggered, the other leg of the order is automatically canceled.
- If you have started an intraday buy order and the order has not been closed then the trader has to make a delivery. Alternatively, if the intraday sell order is closed and the trader does not have shares in the Demat account, then the share will go into auction. In each case, the trader has to face losses. Hence the caution is warranted.
- At the end of the trading day, the trader will get the contract note which will show the cost of the buy and sell trades and the associated cost like brokerage, GST, STT stamp duty, turnover tax, etc. The actual profit and loss of the intraday trade are considered only after calculating all these costs, which can be checked in the ledger account.
- An intraday trader must maintain discipline concerning placing the right type of order (market order Vs limit order), stop losses and booking profits. This makes managing risks and monitoring very important and intraday trading very easy.
How an Intraday Trading Process is different from Normal Delivery?
Intraday trading is done with pure intent, closing out the trade on the same day and booking the profits and losses is very essential. It is different from delivery trading in many ways:
- Although a person must have a Demat account, the Demat account is not involved in any way. When you buy or sell shares in delivery trade you need funds and thus it is essential to have a Demat account. In intraday trade, you don’t need it for either of the transactions. You need to pay margin and take long or short positions for intraday.
- In delivery trade analysis of fundamentals and techniques of a stock is necessary, intraday trade is more technical. Preparing charts, keeping track of news flows, etc is very important to get profit from any kind of momentum in the market.
- The delivery trades are treated as normal business income or as capital gains, in terms of taxation of profits. But the intraday trade being done without the intent of taking delivery is treated speculative income for tax purposes. The speculative losses on intraday trading can only set off against speculative profits.