What type of a trader are you? Do you buy and sell securities within the same trading day, or do you practice the buy and hold strategy?
Trading can be of different types, and one such type is called delivery trading that involves taking possession of the stocks (taking delivery) and then selling it on a different date. Equity delivery is popular among investors who wish to stay invested for long tenures. Let us understand what is equity delivery and how it can benefit you.
This article covers:
- What is equity delivery – the concept
- Equity delivery and settlement
- Common aspects of equity delivery
- Delivery vs intraday trading
- Benefits of equity delivery
- Drawbacks of equity delivery
What is equity delivery – the concept
Equity delivery or delivery trading is a trading strategy wherein you buy stocks and do not sell them off within the same trading day. Alternatively, if you buy and hold stocks for a few days, weeks, months, or even years, you are said to be indulging in delivery trading. This is because, in this type of trading, the investor takes delivery of the stocks in their Demat account and then makes the next move of selling them.
Equity delivery, therefore, is a buy and hold strategy wherein you try to hold on to your investments aiming to earn the maximum possible returns.
Equity delivery and settlement
Once you place a buy order for stocks, it generally takes T+2 days for the shares to be credited to your Demat account. Here, ‘T’ means the date on which you have transacted, i.e., placed a buy order. For example, if you placed a buy order on the 11th of the month, the share would be credited to your Demat account by the 13th of the month.
Common aspects of equity delivery
Here are some of the common aspects of delivery trading:
- You need a Demat account where the shares would be credited and stored till you sell them off.
- You need to pay the entire cost of buying the stock within the prescribed time duration, generally T+2 days.
- Besides equity, delivery trading is available for other securities as well like commodities, derivatives, or currency, among others.
Delivery vs intraday trading
Intraday trading as a concept is the opposite of delivery trading. While delivery trading involves buying and holding on to the security, intraday is when you square off your position within the same trading day, meaning that you buy and sell the security within a single trading session.
So, while equity delivery is a long-term strategy, intraday trading is a short-term strategy suitable for investors who have the risk appetite to bear the volatility in markets.
Benefits of equity delivery
Now that you have understood what equity delivery and the various aspects associated with it is, let’s assess its advantages:
Potential of good returns
Under equity delivery, short-term volatility is not a matter of concern. As such, the volatility risks are reduced when you have a long-term horizon. You can wait for the stock prices to appreciate considerably before you sell them and book profits. Delivery trading, thus, increases the potential of earning returns and helps in capital appreciation.
Companies might declare dividends to reward their shareholders. If you own the company’s shares when the dividend is declared, you become eligible to earn the dividend, thus enhancing investment income.
Participation in bonus and rights issues
Many companies issue bonus shares to their shareholders time-to-time. Bonus shares, as the name suggests are additional shares handed out to existing shareholders. So if an investor happens to be holding a significant number of shares, on bonus issue, they are presented with additional shares for free, increasing their shareholding and also the potential for profits for the investor.
Others offer rights issues which allow you to buy additional shares of the company at a reduced price before such shares are offered to the public.
Both bonus shares and rights issues help in increasing your shareholding in the company.
Thereafter, if the company grows, you can generate profits on your shareholding. This bonus and rights issue is available for shareholders of the company, i.e. investors who hold onto the company’s shares when the issue is made.
Tax may be the biggest argument in favour of equity delivery and long term holding. Equity delivery allows tax-free returns up to Rs. 1 lakh if you stay invested for at least 12 mths. So, with equity delivery trading, you can naturally save yourself some taxes. Even if you get higher returns, the tax liability would only be 10% of the returns, on the amount which exceeds Rs. 1 lakh.
Drawbacks of equity delivery
Though beneficial, equity delivery has some drawbacks as well. A few of them are as follows:
- You may need to invest a considerable amount upfront when buying the shares.
- Personal liquidity is affected if you hold onto the stock for a long time
- If the market trend reverses and the stock that you own loses its potential, you might suffer a loss
- The brokerage and Securities Transaction Tax (STT) may be higher in delivery trading because the charges apply for buying as well as selling activities of the equity delivery trade.
The bottom line
Stock markets move fast and unpredictably. A rising stock today may bite the dust tomorrow. As many factors remain out of an investor’s control, it becomes more important to plan trade strategies in accordance with one’s risk tolerance and investment capacities. Make sure to do your own research before investing. You can start by screening stocks using Tickertape’s Screener. Start planning your strategy for the Muhurat Trading session is just around the corner. It is considered auspicious to invest during this shubh muhurat by the Indian investors community.
Equity delivery is a concept where a trader can safeguard himself against the irrational price movements in the markets. It also gives the trader a window to decide at what price and what quantity would he like to book his profits. It also is beneficial for tax planning and capital appreciation.
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