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How Exactly does Intraday Trading Work?

Once the trader has identified as an intraday trade, they are entitled to higher leverage. For example, with a margin of Rs.10,000 you can take open positions to the extent of Rs.80,000, which is defined as 12.5% margin or 8 times leverage. When you buy or sell the stock intraday in the morning it has to be closed out on the same day. Normally, brokers have their own Risk Management System (RMS) which will close out all open intraday transactions between 3 pm and 3.15 pm. However, the onus of closing out an intraday trade is on the trader.

The 5-Step Process for Intraday Trading

  • When the order is placed, the trader has to clearly define that it is an intraday trade. Only then, the broker will allow the trader to get the higher leverage that is applicable to intraday trading. It is the responsibility of the trader to ensure that the trade that is initiated is closed out on the same day. While the broker will run the RMS system to close out any open orders after 3 pm, if any order still remains open then the losses will have to be borne by the trader.
  • When the trader places the order, it can be further fine tuned as a cover order or a bracket order. A cover order includes the stop loss defined at the time of the order itself. The trader can also place a bracket order which entails putting a stop loss and profit target at the time of placing the order itself. The bracket order is an (either-or) order. That means if the stop loss or profit target is triggered, then the other leg of the order is automatically cancelled.
  • If you have initiated an intraday buy order and the order has not been closed then the trader has to take delivery. Alternatively, if the intraday sell order is closed and the trader does not have shares in the demat account, then the shares will go into auction. In both the cases, the losses are borne by the trader. Hence caution is warranted.
  • At the end of the trading day, the trader will get the contract note which shows the cost of the buy and the sell trades and the associated costs like brokerage, GST, STT, stamp duty, turnover tax etc. The actual profit or loss of the intraday trader will be after considering all these costs, which can be checked in the ledger account.
  • The intraday trader needs to maintain discipline with respect to placing the right type of orders (market order versus limit order), stop losses and booking profits. Managing risks and monitoring prices is a key requirement in intraday trading.

How the Intraday Trading Process is different from Normal Delivery

Intraday trading is done purely with the intent of closing out the trade on the same day and booking the profits and losses. It is different from delivery trading in 3 ways:

  • An intraday trade does not involve the demat account in any way. When you buy shares for delivery you need funds and when you sell shares in delivery you need shares in your demat account. In intraday trading, you don’t need either. You just need to pay margin and can take long or short positions for intraday.
  • While delivery trades depend on an analysis of fundamentals and technicals of a stock, intraday is more about technical charts and news flows. Intraday trading process is more about staying on the right side of momentum.
  • In terms of taxation of profits, delivery trades are treated as normal business income or as capital gains. However, intraday trade being done without the intent of taking delivery, is treated as speculative income for tax purposes. Speculative losses on intraday trading can only be set off against speculative profits.
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