Intraday trading refers to trading in shares on the same day before the market closes and making a profit out of the day’s fluctuating prices.
After opening a Demat and a trading account, have you ever received random calls from strangers, who claim to be stock market experts and try to sound smart by having conversations that sound like:
- Sir/ Mam, why don’t you do intraday trading? Are you a long-term investor?
- Sir, I have been personally trading in stocks and if you join my group, I’ll ask you to buy and sell a particular share on the same day, based on our software’s technical analysis. All you have to do is execute the recommendation and every day, you will easily make Rs 4-5K more.
Meanwhile, this call might have reminded you of that friend who had warned you against these kinds of calls. You might have promptly hung up and also wondered what intraday trading really was.
So, what is intraday trading? When you trade in a particular share on the same day, ie, between 9 am and 3 pm (as per Indian stock market trading time), it is called ‘intraday’ trading. This can look like taking a ‘buy’ position in the morning and canceling it off with a ‘sell’ position later during the day.
It can even look like taking a ‘sell’ position first and then crossing this position off by eventually taking a ‘buy’ position later during the day. This means that a trader only has 6 hours of time gap every day to make a profitable living.
How? Well, Demat accounts are accounts that hold your shares in one place when you hold them for over a day. But when you want to opt for intraday trading, you need a trading account and not just a Demat account.
But why intraday trading?
- Some people believe that it’s the shortest and easiest way of making money (also losing money, but people ignore this).
- A lot of self-proclaimed market experts claim to be great mentors, show testimonials of successful trades, and lead many new market enthusiasts into this rabbit hole.
How does intraday trading work?
– If the share price increases on the same day, say from Rs 1,000 to Rs 1,025
- Say Pappu has Rs 1,000 to spare in his pocket and spends the entire money on buying 1 share of Tata Steel at 10 am. At 2.30 pm, when Tata’s share price increases to Rs 1,025, he sells it and makes a profit of Rs 25 ie, 2.5% (which excludes brokerage cost).
- Pappu’s dad Gappu is an intraday trader. He buys 10 shares of Tata Steel for Rs 10,000 at 10.15 am and sells them off at 2.40 pm for Rs 10,250. He too makes a 2.5% profit (Rs 250) like Pappu (excluding brokerage).
- Pappu’s mother Chiku, who simply has Rs 1,000, seeks help from her broker. Her broker offers her leverage (or credit) of Rs 9,000 and credits it to her account. As her bank account now reflects Rs 10,000, she too spends it all to buy 10 Tata Steel shares at 10.30 am. At 2.45 pm, she sells off her 10 shares for Rs 10,250 (10 shares * Rs 1,025), returns the Rs 9,000 credit to her broker, and calculates her profits. To the family’s surprise, Chiku announces a 25% profit (excluding brokerage) from her intraday trade.
- How? She made a profit of Rs 250 on her investment of Rs 1,000; ie 25%.
– If the share price decreases on the same day, say from Rs 1,000 to Rs 980
(In the real world, you would ideally set a stop loss at a certain price point. Stop loss is a tool that automatically cancels off your original position when the share price falls. So, ideally, if you set a stop loss of Rs 995, your software would automatically cancel off the original position when the share price reaches Rs 995. But let’s assume that there is no stop loss here.)
- When Pappu buys 1 share of Tata Steel for Rs 1,000 and sells it at Rs 980, he makes a loss of Rs 20 (1000-980), ie, 2% (which excludes brokerage).
- His father Gappu too makes a 2% loss since he loses Rs 200 (Rs 10,000-9,800 = Rs 200).
- Chiku, on the other hand, is terrified. Though she had bought the shares for Rs 10,000, when she sells them for Rs 9,800, she has already made a loss of Rs 200. But in % terms, her actual loss is 20% (200/ Rs 1,000*100)
- Now once she returns the credit of Rs 9000 to the broker, she is just left with Rs 800 in the evening.
- Since she needs capital of Rs 1,000 to start trading the next day but has only Rs 800, she needs to make an additional Rs 200 (an additional 20%) to restart trading the next day. So, her real loss is 40%. (20% loss of capital & 20% gain that was expected if prices would have increased)
Intraday trading works on quick news, market hearsay, and rumors at times, and needs quick action since your profits depend on how quickly you act on time-sensitive price movements. It needs dedicated time and effort from an investor, and if you are someone who cannot allocate that kind of time or effort consistently, or have too many things on your plate, it’s better to stay away from intraday trading and invest for the long term instead.