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What Are Pros and Cons of Intraday Trading in India

19 May 2020
pros cons of intraday trading

Intraday trading in stock markets means buying and selling of financial instruments like stocks, commodities, currencies etc. on a daily basis. You can either buy the stocks in the morning and sell them before market closes at 3:30pm or sell them first, and then place the buying order before 3:30pm.

Intraday traders make profit due to the volatility in the stock markets. This is both helpful and dangerous at the same time. You can either earn a good amount by intraday trading or lose out a huge chunk of your investment capital. As both the possibilities are equally strong, it is highly essential to understand the pros and cons of day trading.

Pros and Cons of Intraday Trading

Pros of Intraday Trading

• Trade on a margin

• Sell Stocks at High Rate, Buy When Market Falls

• Not Carry Overnight Risk

• Have a Regular Source of Income

• No Need to Study Fundamentals of the Companies

Cons of Intraday Trading

• Can’t Earn Handsome Every Single Day

• High Discipline and Personal Control

• Take High Risk

• Overnight Gap Ups and Downs

• Practice a lot of Technical Analysis, Master Strategies

PROS OF INTRADAY TRADING:

• Trade on a Margin

One of the major advantages of intraday trading as compared to other types of trading is that you can trade using a limited amount in your demat account. Stock brokers often provide their clients with margins, which means that a person can buy or sell stocks worth a huge amount by paying a small percentage of it. Hence, it becomes possible for an intraday trader to buy stocks worth Rs. 100 using just Rs. 10 through intraday trading.  

• Sell Stocks at High Rate, Buy When Market Falls

Intraday traders can use the method of ‘short-selling’ which means first selling a stock and then buying the same stock in the same quantity later to complete the cycle of one transaction. This allows you to earn profits in falling markets as well. This practice cannot be done in other types of trading such as swing trading or medium term trading – at least for cash segment.

• Not Carry Overnight Risk

In intraday trading when the markets close for the day, all your profits or your invested capital (whatever is left of it) is deposited in your account as cash. You can withdraw it and spend it as per your wish, not having to wait till the next day either. A new day gives you a fresh start and you can forget the past wins and losses and start afresh. There is no risk of any sudden happenings overnight which might affect your investment in the markets since you have withdrawn all your capital at market closing time.

• Have a Regular Source of Income

If you are an experience intraday trader and book profitable trades on a regular basis, then intraday trading can help you get a regular source of income to meet your daily expenses. Unlike long term investments, you do not have to wait for the volatility to subside and the prices to start moving up again to book your profits. You can withdraw your profits as hard cash every day.

• No Need to Study Fundamentals of the Companies

In Intraday trading, you do not need to study the fundamentals of the company as the fundamental analysis of the stock is generally useful for long term perspective and not for intraday trading. You can start trading by learning about simpler chart based strategies such as momentum trading, breakouts, reversal and pullback strategies to analyze which stocks to invest in and when.

CONS OF INTRADAY TRADING

• Can’t Earn Handsome Every Single Day

In Intraday trading not all days will give you double digit profits. There are bound to be some days when the markets will not move in favorable direction and you may end up losing out on your investment capital. This is why people call intraday trading risky and are afraid to step in this game. You should be fully aware about the risk and only after understanding the same decide to step into intraday trading.

• High Discipline and Personal Control

If you are among those people who fall prey to panic situations in intraday trading, then this field is not right for you. In intraday trading market movement can be in any direction, and if looking at your capital being washed away makes you impractical then you should not be in this trade. When situation turns southwards, you need to remain calm and take decisions in a well thought of and practical manner without losing control. Many people are unable to do this and make rash decisions in face of losses, which further worsens the situation.

• Take High Risk

Every intraday markets trader has faced loss in the stock markets. The possibility of losing out is present on every day in the stock markets as markets are unpredictable. Hence, for a person who cannot risk his money, it does not make sense to invest the same in intraday trading. You should not invest money that you cannot afford to lose because there will always be a chance that you will lose money while trading in the markets.

• Overnight Gap Ups and Downs

For intraday traders, a new day means a new start. Hence, if the markets have encountered any major news overnight and there have been orders placed overnight for buy or sell, then the stock price opens at a different level than the one it closed on previously. So, you cannot make use of any gap ups or gap downs in the stock market which occurs overnight. If gaps occur in the market during the trading day, the same can be utilized by you to make profit.

• Practice a lot of Technical Analysis, Master Strategies

So while in intraday trading you do not have to read the lengthy financial statements of companies you are investing in, you still need to study and do you research well in understand what type of stocks to pick, the strategies to use, when to enter the trade, when to exit it etc. All these aspects related to intraday trading require a lot of practice as well. Hence, if you cannot spare time for this research, you should not invest in intraday trading.

Alternatively, if you subscribe to the services of a certified investment advisor, then this problem can be solved. However, you must always choose an investment advisor who does research in a scientific manner.

CONCLUSION:

In your intraday trading journey, all of the above mentioned factors need to be considered in depth, to make the right decisions. A 360 degree advice by an investment advisor can help you understand all of this factors while guiding and educating you about the world of intraday trading in stock markets. Ultimately, it is a process of constant, learning, understanding and evaluation every day.

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