All about delivery trading

Stock markets have many applications, some involve genuine investment-led stock purchases and sales; others are merely monetary settlements based on ‘price’ fluctuations. One of the facility of stock market is Delivery Trading. Delivery trading is a very common type of trading. It is a kind of trading where you hold shares for a longer period of time, generally more than a day. It is more inclined towards investing rather than trading.

What is Delivery Trading?

In delivery trades, you cannot ‘Buy-Sell’ stocks during the same day. You have to hold the stock for at least a day. The stocks you buy in delivery trades are added to your demat account. This entire process is generally referred to as Delivery Trading. They are yours, until you decide to sell them, which could take days, weeks, months, or years based on your choice. You have a complete control over your stocks.

Another important element of delivery trading is that you cannot purchase or sell without having all of the necessary funds beforehand. As a result, when you place an order for a transaction, you effectively freeze the funds or shares.

For example, if you place a Rs 15,000 order, the amount of funds available for stock purchases (cash limit) should be at least Rs 15,000 only after that, you'd be able to buy the stock. If you want to sell shares, you should be able to do so using your demat account.

Advantages of Delivery Trading

No Time Limit

You can keep your stocks for as long as you like. It will remain in your possession until you decide to sell it for whatever reason. You could hold on to the shares when the market is bad, and sell them only when the prices suit you or when you see a large profit. In contrast to intra-day trading; here you are not obligated to sell your equities at the end of the trading day.

Dividends and Bonus

As owner of the stock, you are eligible for all of the company's bonuses. This includes cashing dividends, purchasing extra stock when the corporation offers bonus share. That means that if the company announced 1:1 bonus share, you would get a stock free for each stock you hold.

Short selling - Not a risk

Short selling is the practise of selling the shares on intraday basis and buying them back same day before the conclusion of the trading day. It's a high-risk trading technique that relies on the stock price falling during the day. You can't short sell in delivery trading.

Higher Returns

When you keep your money in a bank, you earn a maximum of 7% or 8% interest per year. But when you invest in shares, you may expect returns of at least 15% (based on historical data). Some stocks might even provide you returns as high as 40% in a year. Long-term trading yields the best results in the stock market.

Lending Shares for Interest through SLBM

Securities Lending and Borrowing Mechanism (SLBM) is a new phenomenon for Indian markets but in long existence in developed markets. It is interesting to note that you could lend your shares on SLBM platform of exchange and earn extra income in the form of interest; however this requires longer lending period.

Disadvantages of Delivery Trading

Higher Transaction Tax

Delivery trading has higher trading and Securities Transaction Tax (STT). STT on delivery trade is levied at 0.1% for both buy and sell transactions separately. On the other hand, trading on Derivative segment attracts much lesser STT and that too only on Sell Side Trades.

No Leveraging, full upfront payment

You must pay the total transaction amount in full upfront. Although, delivery trading could also be done using Margin Trading Facility (MTF) offered by your broker; comes with finance cost. So, unless you are sure of making returns higher than finance cost, you would make losses. MTF allows your broker to fund you against your shareholding for a fee.

Depository Charges

Every delivery trade results into movement of stocks between yours and your broker’s Demat account. Depository (DP) charges are to be paid to CDSL/NSDL for every delivery trade.

Higher Taxation

Delivery trading attracts Short Term Capital Gain (STCG) tax charged at 15% on the profits earned through delivery trading. Profits, are after accounting for all the direct costs including trading charges, brokerages and taxes. Income, is classified as Short Term Gain, when holding period of shares is less than 36 months; but if held for longer would only attract Long Term Capital Gains Tax which is only 10% in India. Taxes on delivery trades are much lesser compared to trading in derivative segments.

Tips on Delivery Trading

1. Do not act on any Trading tips, until you have done your own research.

2. Maintain only required funds in your account to take delivery. You cannot buy or sell equities, until you have all of the necessary funds in your account.

3. Let your profits run; Sell only when your stock has reached its target price.

4. It is always a good idea to set a stop loss order for every trade you make.

5. It is equally vital to not put all of your eggs in one basket, thus it is always smart to invest in different stocks. Investing in multiple companies will ensure that your back has a larger possibility of advantages and use of a lower risk.

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