What is delivery trading?
Delivery trading is a traditional method of buying and selling securities in the financial markets. It involves the physical transfer of ownership of stocks, bonds, or other financial instruments from the seller to the buyer. In delivery trading, the buyer holds onto the purchased securities for a longer period, typically more than one trading day, with the intention of owning them as an investment.
Unlike intraday trading, where positions are opened and closed within the same trading day, delivery trading allows investors to hold onto their assets for an extended period, potentially benefiting from long-term price appreciation.
Mechanics of delivery trading
Buying and holding: In delivery trading, an investor selects a stock they believe will increase in value over time. They then place an order to purchase a certain number of shares at the prevailing market price. Once the order is executed, the shares are credited to the investor's Demat (Dematerialized) account, indicating ownership.
Settlement: After the order is executed, the settlement process begins. The buyer's broker notifies the exchange about the trade, and the exchange facilitates the transfer of shares from the seller's Demat account to the buyer's Demat account. The actual transfer of shares takes place on the settlement date, which is typically one business day after the transaction (T+1).
Ownership and holding period: The investor becomes the rightful owner of the shares and can hold them for as long as desired. The goal is to benefit from any potential price appreciation in the future.
Capital and brokerage charges: The investor needs to have sufficient capital to cover the cost of purchasing the shares. Additionally, brokerage charges and other applicable fees are incurred for executing the trade.
Also read: Types of Stock Trading
Let us understand this with help of an example
Meet Ravi, an aspiring investor looking to engage in delivery trading. Ravi believes that XYZ Ltd., a technology company, has strong growth prospects over the next few years. He decides to purchase 100 shares of XYZ Ltd. at the current market price of Rs. 500 per share.
Ravi places an order for 100 shares of XYZ Ltd. The order is executed, and Ravi's Demat account is credited with 100 shares of XYZ Ltd. The settlement date is set for one trading day after the transaction.
Over the next two years, XYZ Ltd. experiences significant growth due to successful product launches and increased demand for its services. The stock price of XYZ Ltd. rises to Rs. 750 per share.
Recognizing the opportunity for profit, Ravi decides to sell his shares of XYZ Ltd. He places a sell order with his broker, and the shares are debited from his Demat account. The settlement process is initiated, and T+1 day later, Ravi receives the funds from the sale in his trading account.
In this example, Ravi engaged in a delivery trade by purchasing and holding shares of XYZ Ltd. for a substantial period. His decision to hold the shares paid off as he benefited from the substantial price appreciation, leading to a profit.
Delivery trading rules in the Indian stock market
Delivery trading is subject to certain rules and regulations:
T+1 settlement: In India, the settlement cycle for delivery trading is typically T+1, which means that when you buy shares, you must make the payment within two trading days from the date of purchase.
Demat account: To engage in delivery trading, investors are required to have a Demat account, which can be opened with any broker like Bajaj Financial Securities Limited (BFSL), this account holds the electronic records of their investments.
Minimum holding period for tax benefits: To be eligible for long-term capital gains tax benefits, investors need to hold stocks for at least one year.
Difference between delivery trading and intraday trading
The main difference between delivery trading and intraday trading is the time frame in which the trades are executed. Delivery traders buy and hold the shares for a minimum of one day, while intraday traders buy and sell the shares on the same day.
Here is a table that summarises the key differences between delivery trading and intraday trading:
|Minimum of one day
|Potentially Lower risk
|Potentially Higher risk
|Higher transaction costs
|Lower transaction costs
|Equity delivery gain is a Capital gains income and it is taxed accordingly.
|Intraday trading gains are business profit.
Advantages and disadvantages of delivery trading
- Long-term growth potential: Delivery trading is ideal for investors looking to benefit from the long-term growth potential of the stock market. Holding onto investments for an extended period allows investors to ride out short-term market fluctuations.
- Dividend income: Investors who hold stocks for the long term can receive dividends, which are a portion of a company's profits distributed to shareholders.
- Reduced pressure: Unlike intraday trading, where quick decisions are required, delivery trading offers a more relaxed pace, allowing investors to conduct thorough research before making investment decisions.
- Market Volatility: While delivery trading aims for long-term gains, the stock market can be volatile, leading to unexpected price fluctuations that may result in losses.
- Company Performance: The success of a delivery trade depends on the company's overall performance and management decisions, which are beyond the investor's control.
Delivery trading is a fundamental approach to investing in the stock market, allowing investors to take a long-term view of their holdings. It offers the potential for capital appreciation, dividend income, and reduced pressure to make quick decisions. However, it comes with its own set of risks, including market volatility and potential opportunity costs. Understanding the differences between delivery trading and intraday trading is essential for investors to choose the approach that aligns with their financial goals, risk tolerance, and investment strategy.
Open your Demat account today and start delivery trading today at Bajaj Finance Securities Limited Platform (BFSL).