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Importance of Managing Costs in Intraday Trading

Importance of Managing Costs in Intraday Trading

There are 3 facets to intraday trading viz. identifying good stocks, managing the risk and bringing down your costs. Your intraday trading charges contain a host of other costs apart from the brokerage and hence you need to take a holistic view to understand the break even of your trade. The key feature of intraday trading is that t is a risky game with prospects of returns if risk and costs are managed properly. Your starting point in intraday trading must be to fully understand the cost structure and minimize the impact of trading costs.

What are the Charges in Intraday Trading

  • The most basic cost is the brokerage that you pay to your broker for facilitating your transaction. These brokerage costs on equity can range from 4 basis points to 5 basis points in a best case scenario. That is a break even impact of nearly Rs. 1 combined on a stock price of Rs.1000. But brokerage is only one of the charges. There are other charges too.
  • The securities transaction tax (STT) is imposed by the government on the sell side of the intraday transaction. There is no STT on the buy leg if it is an intraday transaction. The rate of STT is 25 basis points or 0.025% on the sell side value of the transaction. This STT was introduced in 2004 and has continued ever since. STT is imposed on transaction value.
  • At the first level regulatory front there are transaction charges imposed by the stock exchange and the turnover fee imposed by SEBI. For example, the NSE imposes transaction costs at 0.325 basis points on the transaction value. SEBI turnover fee is charged at a flat Rs.15 for every Rs.1 crore worth of transactions. These statutory charges have to be paid on the transaction value.
  • Effective July 2017, the 15% service tax on brokerage was replaced by the 18% GST. This GST of 18% is imposed on value of (brokerage plus transaction charges). Higher the brokerage, higher the GST and that is why keeping brokerage costs low is important for intraday trading. The GST is an indirect tax which is imposed on the broker and passed on to you.
  • Stamp duty is levied differently by each state. In the case of Maharashtra, the stamp duty is levied at 0.002% of the value of the transaction. Every contract note needs to be stamped as per regulations of the respective state and that is why the stamp duty is charged. All these add up to the total cost of your intraday trading.

There are Some Hidden Costs in Intraday Trading too

While brokerage and other costs are the apparent costs in your contract note, there are certain costs that are not visible in your contract note.

  • Risk of trading spreads is a big risk for intraday traders. That is the reason you are required to trade on the most liquid shares only. When you trade less liquid shares, the trading spreads can widen and that leads to basis risk for an intraday trader. This is a cost that is not apparent but does impact the profitability of your intraday trades.
  • Risk of volatility is another risk especially if you are trading options on an intraday basis. When volatility in the market goes up, the value of the options go up. If you have sold an option and if the volatility increases during the day, then the price of the option will go up leading to losses on your trade. This, again, is a cost that is not apparent but impacts your profitability.
  • Then there is a capital risk that you may run when you are trading intraday. You may have reached a stage wherein you cannot compromise your capital beyond a point calling for you to truncate your positions at a loss. This is a cost that is not factored in normal costs but does impact your intraday trading performance.
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