Intraday Trading Explained For Beginners - All You Need to Know!
Most beginners come to the stock market because of intraday trading. They see people posting screenshots of their impressive profits on social media and are drawn to the idea of “making ₹10,000+ daily”. However, it is important to emphasise that intraday trading requires a significant amount of awareness and knowledge. In this article, we will explain everything you need to know about intraday trading in the stock market.
What is Intraday Trading?
Intraday equity trading refers to the buying and selling of securities on the same day. For example, if you buy a stock at 10 AM after the market opens and sell the stock at 2 PM before the market closes, it is intraday trading. The trader exploits the small price movements in the stock to make a profit.
What Makes Intraday Trading Special?
Apart from the time period you hold the security, the two features that make intraday trading special are leverage and short selling.
What is Leverage?
Leverage is the extra money your broker offers you so that you can trade in larger quantities and potentially make more profit or loss. When you place a buy order for a stock, the broker will ask you for the order type. The two types are Intraday (MIS) and Long-Term (CNC). When placing an intraday order, you tell the broker that you will square off or exit the position before the market closes on the same day. The broker will automatically give you leverage if you choose an intraday order. Most brokers in India provide leverage of 5X for intraday trading.
Many traders are attracted to leverage as it allows them to trade larger quantities with less capital, potentially increasing their profits. Consequently, by offering leverage, the broker can also earn more brokerage.
An Illustration to Understand Leverage:
Let us assume that you have ₹1000 as your trading capital. You found that the current price of Mahindra & Mahindra (M&M) stock is ₹1000 after chart analysis. However, you predict the price will rise to ₹1010 or higher by 3:30 PM. So you decide to buy the stock now at ₹1000 to sell at ₹1010 later.
If you place a long-term (CNC) order, you must pay the entire ₹1000 to buy the stock. With the ₹1000 you have, you can only buy one quantity of the stock.
Alternatively, if you place an Intraday (MIS) order, you’re informing the broker that you will sell the stock before the market closes today. The broker will give you 5X leverage, meaning you can trade with five times the actual capital. Since you have ₹1000, you can trade with ₹5000, which means you can buy five stocks of M&M.
Scenario 1: Long-term (CNC) Order
You bought one quantity of M&M at ₹1000 and sold it at ₹1010.
Profit/Loss = (Selling Price - Buying Price) X Quantity
= (1010 - 1000) X 1
Your profit is ₹10.
Scenario 2: Intraday (MIS) Order
You bought five quantities of M&M at ₹1000 and sold it at ₹1010.
Profit/Loss = (Selling Price - Buying Price) X Quantity
= (1010 - 1000) X 5
Your profit is ₹50, which is five times more than scenario 1.
What if the Stock Price Falls?
Leverage is a double-edged sword. Although leveraged trades have the potential to make five-fold returns compared to non-leveraged ones, it also has an equal potential to make five times the losses you would otherwise make.
In the previous illustration, we saw what would happen if the stock went up to ₹1010. But what would happen if our analysis had gone wrong and the stock fell to ₹990 or even lower? We would be sitting with a loss of ₹50 compared to ₹10 in the non-leveraged trade.
What happens if the price goes below ₹990?
The loss will keep on accumulating the more the price dips. If the price of M&M goes to ₹900, your losses will amount to ₹500, and you will lose 50% of your entire capital in a single trade.
How to avoid huge losses?
The two rules you can use to minimize losses are:
- Proper Learning & Systematic Trading Habits
- Set a Stop-Loss
A stop loss is an advanced order which sells a stock when it reaches a specific price. It is a tool used to limit potential loss. If you had set a stop loss at ₹995 in the previous scenario, your loss would’ve been limited to ₹25.
What Happens if You Don’t Square Off The Position Before Market Closes?
Square-off refers to closing your intraday trade. If you don’t square off your positions, the broker will auto-square it off before the market closes. Find the auto square-off timings for different brokers below;
All intraday positions will be squared off automatically at the respective auto square-off timings at the stock’s current market price.
What is Short Selling?
Short selling is an Investment activity in which the investor borrows securities and sells them in hopes of purchasing them at a lower price later.
How Does Short Selling Work?
When a trader short-sells a stock via a broker, the short-seller first borrows the stocks from the broker for a small fee. These stocks are sold at the current market price in anticipation of a drop in value. Once the price drops, the short-seller buys back the same number of stocks at a lower price and pocket the difference. After this, the short seller will return the borrowed stocks to the broker.
Let's say you believe that the shares of Reliance Industries (RIL) are overvalued and will decline shortly.
1. You approach your broker and borrow a share of RIL at the current market price of ₹2500 per share.
2. You immediately sell the borrowed share for ₹2500
3. Time passes, and as you predicted, the price of RIL shares drops to ₹2480 per share.
4. Now, you decide to close your short position and buy back the shares. You use ₹2500 of the cash you received earlier to purchase one share of RIL.
5. You return the share to your broker, effectively closing the short position.
6. By buying back the share at a lower price, you made a profit of ₹20 (₹2,500 initial cash - ₹2,450 used to buy back shares) from the price decline.
Please note that short selling involves risk because if RIL’s shares had risen instead of fallen, you would have faced a loss, potentially needing to buy back the shares at a higher price.
Long Position vs Short Position
- A long position means that the investor has bought the shares and is expecting the price to go up.
- A short position means that the investor has short-sold a share and is expecting the prices to fall.
- A long position makes a profit when the price rises while a short position makes a profit when the price falls.
What Are The Advantages of Intraday Trading?
It enables the trader to trade in higher quantities with less capital, potentially making more profit or loss.
- Short Selling
Short Selling allows traders to sell a stock first and buy it later. It means that the trader can make profits even when the market falls. Intraday trading enables the trader to make a profit wherever the market goes.
- No Overnight Risks
Any economic, social, or political events affect the stock price, and if you are in a swing or positional trade in that stock, the stock price can open at a gap down, which could lead to loss. When comparing intraday trading to swing or positional trading, this risk does not exist as you square off your positions on the same day, and whatever happens overnight will not affect you.
- Trading is a Great Business
Compared to traditional businesses, trading offers a high level of convenience for starting a venture. It requires minimal infrastructure and can be done from anywhere in the world with minimal expenses.
Trading profits get realized in actual cash on the same day. Therefore, trading can generate cashflows for you.
What are the Disadvantages of Intraday Trading?
Leverage is a double-edged sword. Even though it can earn you potentially higher profits, it can also lead to potentially higher losses.
- 95 - 99% of Intraday Traders Lose Money
Intraday trading is a difficult skill to master. Trading without proper knowledge can lead to huge losses. When starting, only use the money you can afford to lose as your capital. You can gradually increase your capital once you become better.
Intraday Trading is not only very time-consuming but also mentally demanding. You have to sit in front of the screen throughout the trading hours, resulting in physical and mental exhaustion.
How to Start Intraday Trading?
To start intraday trading, you need a Demat and trading account with a broker. If you still don’t have a Demat & trading account, create one right away using the links given below:
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How to Measure Intraday Trading Returns?
We should always measure returns in percentage terms and not in absolute terms. Absolute returns will not give an idea of the capital used.
Returns = (Profit / Capital Used) X 100
If you made ₹1000 using ₹1,00,000 as capital, then your returns would be:
(1000 / 100000) X 100 = 1%
How to Make Profit from Intraday Trading?
To succeed in intraday trading, focus on learning the basics and mastering the best strategies. Start with minimum capital in the initial stages to practice effectively. Conduct thorough research and analysis, implement risk management techniques, and maintain discipline. These key elements will help you navigate the markets with a calculated approach, increasing your chances of profitability. Through continuous learning and discipline, you can make consistent profit in intraday trading.
Disclaimer: The information and examples mentioned in the article are purely for educational purposes. Please do your own research before investing or trading in the stock markets.