The stock market offers investors numerous ways and plenty of wiggle room to grow their wealth and earn profits. For example, you could make money in the stock market by investing in index exchange-traded funds(ETFs). At the same time, you can make money in a falling market through shorting in the derivatives market. That said, there are multiple concepts, techniques, and aspects you have to have to familiarise yourself with as a stock market investor. However, before uncovering the more complex concepts and techniques, you should be thorough with the basics. This blog will cover the fundamental concept of a delivery trade in the stock market.
What is a Delivery Trade?
When you invest in shares on the stock market, you get those shares credited to your demat account. When shares are credited to your demat account, it is called a delivery. So, if you wish to become an investor in any publicly traded company, listed on the Indian stock exchanges, you have to opt for the delivery of shares.Delivery trading is a type of trading in which assets are delivered to the trader’s depository accountTo understand more about delivery trading, we will have to first learn how to place a delivery trade.
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How to Perform Delivery Trading?
When you buy or sell shares, those shares are not transferred to or out of your demat account then and there. India follows the T+2 rolling settlement cycle. What this means is when you buy shares, they get credited to your demat account after two trading days.
You can always reverse the transaction on the same day and exit the trade. To put it plain and simple, if you buy shares of Company A, you can sell them on the same day, and close your positions. This type of trading is called intraday trading. Most brokers provide you with a dedicated intraday option when you are placing a trade through your trading account. Choosing this option will automatically close the open position before the end of the trading day. If you do not select the intraday option when placing a trade, the delivery trade option is usually chosen by default. When you place a buy order in this case, shares will be credited to your demat account. In the case of a sell order, you can only place a delivery trade if you have the shares of that company in your demat account. And similar to a buy delivery, a sell delivery also takes T+2 days.
Trading in Long and Short Term Delivery
So, if you want to invest in a company’s shares for the long term, you are basically engaging in delivery trading. Here, you may hold shares of a company for several years because you foresee the company growing its earnings over the next few years. That could be a result of business expansion, favourable macroeconomic conditions, or other fundamental factors. Which is why if you plan on investing your money like this, you must learn to fundamentally analyse businesses. To fundamentally analyse businesses, you should read research reports, listen to management interviews, and assess financial statements.
However, at the same time, you are also partaking in delivery trading if you hold the stock for a few months, weeks, or days. This type of delivery trading is popularly referred to as swing trading, and in some cases, short-term investing. If you want to perform swing trading, you may rely on both fundamental and technical analysis. Technical analysis refers to analysing the price action to predict the movement of the stock price in the near future.
Delivery Trading Vs Intraday Trading
If we simplify things, stock market investors have two different ways to trade: delivery trading and intraday trading. Intraday trading is the antithesis of delivery trading, as this type of trading does not involve the delivery of stocks in the trader’s demat account. Therefore, in the case of intraday trading, the trader has to take a loss if the stock price moves against expectations. On the other hand, delivery traders can continue to hold their stocks if the stock does not perform in the near-term, provided the business fundamentals are strong. Which is why, delivery trading is considered less risky compared to intraday trading.
However, to place a delivery trade, you must have money in your trading account. Moreover, you can only sell the shares you hold in your demat account. That is not the case with intraday trading since, as an intraday trader you can trade using margin, which is essentially a loan. At the same time, you can even short sell shares and make money in a falling market. Delivery traders benefit from bonuses and dividends, while intraday traders may not have to pay fees like depository participant fees.
To conclude, both trading styles have their pros and cons, and it is up to the trader to decide which one suits them better. However, delivery trading is generally considered to be the safer option because a trader who places a delivery trade has no time limit to sell the stock.However, skillful traders who put in the time may practise both trading styles.