Intraday trading refers to the practice of buying and selling of stocks or financial securities within one day without taking overnight ownership of the stocks or the instruments. Intraday trading takes advantage of the daily fluctuation in prices of some of most liquid and volatile stocks to help people in earning profits.
1. You can earn in falling markets too
2. You do not need to worry about your positions overnight
3. You can place bigger bets by using margins
4. You don’t need to study fundamentals for most strategies
5. You can earn a regular income
6. Catching the pulse of the markets and the economy
Generally, long term investors in the stock market earn money when the prices of stocks increase, which eventually leads to an increase in the value of their holdings in the markets. The bull market or upward trending markets are more helpful and profit making for long term investors. However, people who invest in intraday markets can make profits while the markets are falling. This is possible through a technique called ‘short-selling’.
Short selling is the process of selling a stock at a higher price in and later buying the same when the prices reduce. If you are short selling a stock, you are essentially borrowing it from the exchange to sell it at a fixed price, and later, buying the same stock at the lower price and returning the stock to the lender.
This practice can be done in terms of all listed instruments. However, for the cash segment, the sell and the buy orders have to be placed on the same day. It means that you cannot sell a stock one day and buy it again the next day.
This facility of selling first and buying later in the cash segment is only available in Intraday trading.
In Intraday trading, all your positions in the market are closed on the same day, which means you do not have to worry about your money at night thinking about how the stock markets will open the next day. Your money does not get ‘stuck’ in the stock markets overnight.
Also, you are not bound to take ownership of the stock or the instrument and hence, any sudden event happening after market closing will most likely not have impact on your money since you have not invested it anywhere.
When you trade in the intraday markets and place intraday order, your stock broker knows that you will close your position at the end of the day and that it is highly unlikely that the price of stock purchased by you will become zero. So, stock brokers offer special margins to intraday traders under which, traders have to only pay a small amount of the total order size as a leverage against any losses.
These margins are fixed for each brokerage house and are often extended to seasoned intraday players.
Some brokers even provide 10 to 15 times leverage to intraday traders. For example, if you have Rs. 100 in your trading account for purchasing stocks, then some brokers can allow you to even buy stocks worth Rs. 1000 or Rs. 1500 on the basis of the amount you have in the trading account.
Generally this facility is extended to customers who generate high brokerage for the brokers.
In intraday trading, it is the price fluctuations which matter most. It does not matter as to which company’s share or stock it is and what is the current situation. If the company’s stock has high volume and liquidity, then irrespective of its present situation, its price will keep fluctuating giving intraday traders an opportunity to invest and earn.
The study of a company’s financial status, the industry it is a part of and the economy in general is called fundamental analysis. Conducting fundamental analysis of a company is a tedious and time taking process. Technical analysis on the other hand is a method of analyzing and researching the price movement of the stock irrespective of other factors.
Technical analysis uses charts for doing research on the stock and is most used method by intraday traders.
So if you are an intraday trader, you do not need to invest a lot of time in reading bulky fundamentals of the stock you are investing in.
Intraday trading has proved as a regular scope of earning for many people as the money earned from the markets can be withdrawn on a daily basis. People investing in intraday markets do face a lot of risks, but the rewards earned are also significant. On the other hand, if you invest for a long term, market conditions might not always be in your favour to generate a regular income.
Of all the people who invest their money in the stock markets, it is the intraday traders who are the first hand recipients of any changes in the markets. Stock markets give signals of all types of economic and social occurings. Be it elections or a pandemic or terror attacks or any major announcements by the political parties. Markets are affected by each happening. And, it is the intraday traders who are the first to see its impact.
Sometimes, before a major expected happening as well, such as a major announcement or RBI monetary policy’s meetings, markets react to what is expected and when the actual event occurs, the chain reaction happens. Intraday traders can make profits from this sudden reactions and can use such volatility to learn about markets and earn more profits.
However, one thing which all must remember is that intraday trading is highly risky. You should get your complete risk analysis done before starting your money in the intraday trading. Not all days will end on a positive note for you. But you need to be patient and plan your strategy accordingly to win back all your losses. A good investment advisor can help you choose your strategy wisely and according to your risk appetite.
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