Advantages and Disadvantages of Intraday Trading

Intraday trading can be compared to sprint which is full of excitement as opposed to long term trading which is like marathon which requires a lot of persistence and patience. Intraday trading is the term which is used in the context of the stock market; it refers to act of buying and selling the stock same day by the person doing trading. Hence in case of intraday trading, there is no open position left as far as a trader is concerned. Let’s look at some of the advantages and disadvantages of intraday trading –

Advantages of Intraday Trading

  1. The first and foremost advantage of intraday trading is that it requires little capital on the part of the trader. So for example if a person has $1000 and he or she want to buy oracle stock which is trading at $100, now if he or she only buy it and keep it then he or she will be able to buy 10 stocks and he or she will profit only when price rise whereas in case of intraday trading he or she can buy it 10 times and sell it 10 times and if the trader has bought at low price and sold at higher price than even if the price remains at $100 at the end of the day he or she will make profit.
  2. Another advantage of intraday trading is that one can leverage the capital to earn maximum profits because in the case of intraday trading it can be done by paying small margin. So for example in the above case if broker gives 10 times margin then a trader can buy 100 stocks of oracle and suppose the price rises to $101 then or she will earn $100 and not $10. Hence due to leverage the profit of intraday trader increased by 10 times.
  3. Another benefit of intraday trading is that it eliminates the overnight risk associated with stocks so if in the above example if a trader holds his or her position overnight and CEO of oracle resigns then the price of oracle stock will decline resulting in loss for the positional trader which is not the case with individual doing intraday trading.

Disadvantages of Intraday Trading

  1. The biggest drawback of intraday trading is that it is not long term in nature as the time frame of intraday trades is 1 day only and in the case of stock markets history is filled with examples where long-term investment has given far superior returns as compared to short term trading.
  2. Another disadvantage of intraday trading is that use of leverage can result in more losses for the intraday trader, so in the above example if the price of oracle falls to $99 then intraday trader will lose $100 as compared to investor who will lose only $10 and hence leverage in case of intraday trading is a double edged sword.
  3. Another disadvantage of intraday trading is that it requires the constant attention of the trader and also transaction costs are high because of frequent buying and selling which is not the case with long term investment where the investor will pay brokerage only 2 times one at the time of buying stocks and other at the time of selling stocks.

As one can see from the above that intraday trading has advantages, as well as disadvantages and any person thinking of doing intraday trading, should carefully analyze both benefits as well as limitations and then take a decision whether to do intraday trading or not.

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