Intraday Trading – Benefits and Alternative Trading Methods
Purchasing and selling securities listed in a stock exchange on the same day is known as intraday trading. The primary purpose of transacting in this method is to realise capital gains on purchased securities as well as minimise risks by keeping money invested for an extended period.
How to Select Stocks for Intraday Trading
It is essential to identify best intraday stocks while undertaking such investments, as it has relatively higher risks.
- Choose highly liquid stocks
Liquidity is a prime feature of intraday stocks, as without this feature such trade would not be possible. Equity shares of small and mid-cap companies can be easily bought and sold, as well as experience tremendous volatility due to market fluctuations.
The cyclical variations should be carefully observed by analysing 52-week high and low values, as it gives a precise idea about whether an individual should assume long or short positions while investing.
Best intraday stocks tend to possess medium to high volatility in price fluctuations. Generally, market value fluctuations more than 3% should be avoided while performing intraday trading, as the possibility of incurring a loss is huge in case of an adverse downturn in the stock market in an economy.
- Strong correlation
It is ideal to purchase an intraday share having a high correlation with a benchmark index of a reputed stock exchange. Thus, substantial movement in share prices can be observed when index value tends to fluctuate.
Since benchmark indices consist of shares of top companies listed in a stock exchange, it can be assumed that fluctuations will move in an upward direction, barring any economic abnormalities. Thus, capital appreciation through intraday trading will be substantial if this rule is followed.
- Higher trade volume
Intraday investors can track trade volume index of a particular security to identify price fluctuations. A higher trade volume index reflects either excessive demand or supply, depending upon an underlying company’s performance. Capital appreciation gains can be earned through both purchase and sale transactions in such cases.
Benefits of Intraday Trading
Transacting in intraday share has the following advantages:
- Lower risk
Since securities are purchased on the same day in intraday trading, risk of incurring substantial losses are minimised. However, in case of standard trading wherein the principal is kept locked in for a considerable period, changes in price can be significant, making an investor worse off in case of stock market downturns.
- Lower commission charges
Stockbrokers charge nominal fees while transacting in intraday trading stocks, as delivery expenses of transferring security in the name of an investor are forgone. Stock transaction tax, trade fees, services tax, etc. are all-inclusive in brokerage fees, and such deductions reduce the income of an investor.
Generally, brokerage fees on intraday trading stocks are one-tenth of what is levied if standard trading is undertaken.
- Higher profits
Intraday trading is known to yield massive wealth creation for investors, provided accurate investment strategies are applied. Capital appreciation in a rising stock market can be achieved easily. In case of adverse market conditions, intraday share traders use the method of short selling to earn profits.
Another benefit of intraday trading is that total financial resources invested can be quickly recovered at any time. It is not blocked through an asset purchase transaction. This preserves liquidity requirements of an investor to meet any personal needs.
- Capital gains through market fluctuations
Investors can profit through intraday trading in both bullish and bearish markets, depending upon the investment strategy adopted in such situations. Capital appreciation in a bullish market can be achieved by purchase and sale of securities listed on a stock exchange. In the event of the stock market downturn, profits can be generated through short-selling financial instruments.
An investor needs to have extensive knowledge about the intricate workings of the stock market for realising adequate profits. It may seem overwhelming for a novice investor looking to generate capital gains. It is essential to select securities of appropriate companies in such cases, for which precise analysis of financial records is required to be done.
Market volatility plays an important role when it comes to intraday trading stocks. In case of unexpected market fluctuations, investors can incur losses. Technical analysis of markets is based on past volatility, and thereby, might not be 100% accurate in all instances.
Alternative Trading methods
Investors wary of intraday trading in the stock market can choose from various trading methods, such as:
- Standard trading
Under this trading method, individuals can invest in stocks of different companies. It is generally undertaken for a more extended period, wherein investors can profit from both capital appreciation and periodic dividend payments.
However, such trading has to be done through a brokerage firm, wherein the percentages of total profits are deducted as payments. As periodic receipts from invested securities are obtained, brokerage fees only consume a small portion of the entire income generation. Additionally, many brokerage firms provide advice regarding most profitable investable securities in the market, acting as a stable investment option for novice investors.
- Momentum trading
Capital appreciation is the primary target in momentum trading. Investors purchase securities having a high potential for growth in the future, but the prices are suppressed due to market fluctuations. Relative or absolute momentum investment strategies can be implemented, wherein stocks of companies underperforming either in a relative or absolute sense can be chosen.
- Swing trading
Similar to momentum trading, swing trading generates capital gains through short term investment strategies. Volatile stocks are targeted in such cases, and procured shares are sold off as soon as a massive movement in prices is witnessed.
Intraday trading can be undertaken depending upon an investor’s knowledge about the stock market. Individuals who do not possess such extensive information can research online about the same before embarking on such investments.