How does intraday trading work?

Before getting into the basics of intraday trading, it is important to understand what is intraday trading. The term intraday means “during the same day”. When a trader purchases and sells stocks listed on a stock exchange on the same trading day, it is known as intraday trading or day trading.

The primary objective behind intraday trading is to realise the profits on the same day. It also minimises trading risks as the funds are not blocked for an extended period. 

How intraday trading works?

Intraday trading is done through online trading platforms that work on a real-time basis. The trader buys and sells the same number of shares of the same company within the trading hours for the day.

While using the online stock trading platform, traders must specify that the transaction is intraday. They can buy or sell stocks listed on the exchange, specifying the quantity and the price. 

The position acquired by the trader (buy or sell) must be squared off at the end of the day. This means that if a trader has bought some stocks, they must be sold before trading on that stock exchange ends for the day.

A trader must also know how to sell intraday shares to make profits. If the trader has sold some stocks instead of buying it is called short-selling. In this case, the same number of shares of the same company must be bought before the trading hours end. 

Here is an intraday trading example to understand how intraday trading works. 

Example 1: 
Trader X buys 100 shares of ICICI Bank @ Rs. 930 at market opening. During the day the stock price rises to Rs. 960 and the trader squares off the position by selling 100 ICICI Bank shares @ Rs. 960. This gives him a profit of (960-930)*100= Rs. 3000
Example 2:
Trader X shorts (sells) 100 shares of ICICI Bank @ Rs. 930 at market opening. During the trading hours, the stock price falls to Rs. 920. At the end of the trading day, the trader will have to square off his position by buying 100 ICICI Bank shares @ Rs. 920. This gives him a loss of (930-920)*100= Rs. 1000

Role of margins

It is essential to understand the concept of margin trading with reference to intraday trading. Intraday trading enables a person to trade on margins. This means that a trader with limited trading funds in his Demat account can also create open trade positions in higher trading lots by borrowing funds from his broker. 

However, this leveraged trade comes with a caveat. On one side, where it can amplify the returns by allowing a trader to transact in higher amounts, it could also lead to higher losses in case the stock prices swing adversely. 

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Intraday trading brokerage 

Traders are required to pay intraday brokerage charges to their broker for executing a day trade. Intraday trading brokerage includes:

• SEBI regulatory charges
• Securities Transaction Tax
• Brokerage and GST on brokerage
• Transaction charges
• Stamp duty

Let’s understand the nuances of these charges. 

• SEBI regulatory charges

The Securities Exchange Board of India (SEBI) charges 0.0002% (share price * number of shares) as a fee for trading. All the stock exchanges in India charge this fee. Irrespective of whether it is an intraday transaction or delivery trading, the rate remains the same.

• Securities transaction tax (STT)

STT is charged at 0.025% of (share price *the number of shares) on the sell side of the intraday transaction.

• Transaction charges

The stock exchange on which the trade is made levies a transaction charge. These differ for the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). For BSE, it is 0.00275% per trade, while for NSE, it is 0.00325% per trade.

• Brokerage and GST on brokerage

Brokers charge an intraday brokerage fee for providing their services. These charges may differ for different brokers. Traders generally have the option of choosing from multiple brokerage plans.

• Stamp duty

Stamp duty levied on the intraday transaction varies according to the location.

Intraday trading vs delivery trading

Delivery trading is different from intraday trading in many ways. When a stock is purchased on a delivery basis, the investor can hold on to it for as long as he wants to but with intraday trading, the position needs to be squared off on the same day.

If the trader does not square off the open position, the online platform converts it into a delivery trade at the end of the trading day and the trader then has to pay the delivery brokerage.

Also Read: How much tax do you pay on stock market gains?

Benefits of intraday trading

Intraday trading offers a sweet deal to stocks and securities traders who want to minimise their risks and maximise their profits. Here are some advantages that intraday trading has to offer:

Lower risk for traders

Since intraday trading involves buying and selling stocks on the same day, a trader can minimise the risk of substantial losses.

In the case of delivery trading, the principal amount is blocked for a considerable period. This opens up the trader to risks that come with significant price changes on the lower side in case the stock market faces a downturn. 

Higher profits 

Intraday trading can yield higher profits as the trader can take full advantage of the rising stock prices on a particular day by using accurate investment strategies.

For instance, higher profits can be realised easily on the same day by trading in stocks seeing a price rise due to favourable stock-related news. In case of a downside in stock prices, intraday share traders can use short selling to earn profits. 

Lower commission charges

Intraday brokerage is lesser than the brokerage charged by stockbrokers for delivery trading. This is because delivery expenses of security transfer in the investor’s name are not included.

Most stockbrokers and trading houses charge an intraday brokerage fee which is one-tenth of what is generally charged in the case of standard or delivery trading. 

Enhanced liquidity

Traders’ money is not blocked for a long period in this kind of trading. Since the purchase and sale of stocks happen on the same day, funds can be used for other financial requirements. 

Capital gains through market fluctuations

Intraday trading gives stock traders opportunities to make profits in both bullish and bearish markets, depending upon the trading strategy used.

In a bullish market purchase and sale of stocks can yield profits, while in a bearish market trend, profits can be generated through the short-selling of stocks, which is the selling and purchase of shares. 

Also Read: Risk management in stock market

Final word

To make profits in the stock market, traders must have a strong understanding of intraday trading. Thoroughly analyzing company charts is crucial for selecting stocks while also considering market volatility.

Unexpected market fluctuations can also lead to losses as the trader cannot hold the stocks. All intraday trader needs to do is pay close attention to intraday price movements and time the trades to make profits by using the short-term price fluctuations in the markets.