Concept of Delivery Trading

What is Delivery Trading ?

Delivery Trading is a trading method in the stock market. The shares are bought and held by the trader for more than a day for the purpose of making profit over a period of time. In delivery based trading, the stock will be delivered to the trader's demat account . This strategy is generally used by long term investors and traders.

In delivery trading, the trader need not square off the position on the same day. The trader can hold on to their shares for more than one day. Usually, the trades are settled according to the T+2 settlement cycle.

Delivery Trading Rules

Delivery trading in the stock market follows certain rules and regulations set by the regulatory bodies and exchanges. Here are some key rules related to delivery trading:

Settlement: In delivery trading, the settlement of trades happens on a T+2 (trade date plus two days) basis in India. This means if you buy shares on Monday, the settlement will take place on Wednesday, and you will receive the shares in your demat account on Wednesday.

Demat Account: To engage in delivery trading, you need to have a demat account. This account holds your shares in electronic form.

Delivery Instruction Slip (DIS): When you buy shares for delivery, you need to submit a Delivery Instruction Slip (DIS) to your broker. This instructs the broker to transfer the shares from the broker's pool account to your demat account.

Physical Share Certificates: In the past, shares were issued in the form of physical certificates. However, with the implementation of dematerialization, physical share certificates are no longer issued, and all trading is done in electronic form.

Delivery vs. Payment (DVP): In delivery trading, the concept of Delivery vs. Payment (DVP) ensures that securities are delivered only when payment is received. This helps in reducing the risk of non-payment or default.

Stamp Duty: Stamp duty is applicable on the transfer of shares in delivery trading. The rate of stamp duty varies from state to state in India.

Settlement Guarantee: Stock exchanges provide settlement guarantee for trades executed on their platform. This ensures that even if one party defaults, the other party will receive the securities or funds.

Difference Between Delivery and Intraday Trading

Delivery trading and intraday trading are two different trading strategies used in the stock market:

Delivery Trading:

1. Time Horizon: In delivery trading, investors buy stocks with the intention of holding them for the long term, typically for weeks, months, or even years.

2. Ownership: When you buy shares in delivery trading, you become the owner of those shares and they are credited to your demat account.

3. Settlement: Settlement in delivery trading happens on a T+2 basis, meaning the shares are delivered to your demat account two days after the trade date.

4. Risk: The risk in delivery trading is lower compared to intraday trading because you are not affected by the intraday volatility of the stock price. You have the opportunity to hold the stock through market fluctuations.

5. Brokerage: Brokerage charges for delivery trading are typically higher than for intraday trading because the broker has to provide the service of delivering the shares to your demat account.

6. Taxation: In India, profits from delivery trading are subject to capital gains tax. If you hold the shares for more than one year, you are eligible for long-term capital gains tax, which is currently taxed at 10% for gains exceeding ?1 lakh. Short-term capital gains tax of 15% is applicable if the shares are held for one year or less.

Intraday Trading:

1. Time Horizon: In intraday trading, traders buy and sell stocks within the same trading day, with the goal of profiting from short-term price movements.

2. Ownership: In intraday trading, traders do not take ownership of the shares. They are buying and selling based on price movements and do not hold the stocks overnight.

3. Settlement: Intraday trades are settled on the same day. Traders do not receive delivery of the shares; instead, profits or losses are settled in cash.

4. Risk: The risk in intraday trading is higher compared to delivery trading because traders are exposed to the volatility of the stock price within a single trading day. They must close their positions by the end of the day to avoid any overnight risk.

5. Brokerage: Brokerage charges for intraday trading are lower compared to delivery trading because the broker does not have to provide the service of delivering the shares to your demat account.

6. Taxation: In India, profits from intraday trading are considered as speculative business income and are taxed at the individual's applicable income tax slab rate. This is different from the capital gains tax treatment in delivery trading.

Advantages of Delivery Trading:

• Ability to hold positions even if facing losses on the day of purchase, and exit them the next day after monitoring the market.

• Generally, brokerage fees are higher in delivery trading compared to other forms of trading.

• Securities transaction tax is higher for delivery trades than for intraday trades.

• Stocks purchased for delivery can also be sold as intraday trades, but not vice versa.

• In delivery trading, the entire cost of the stock is paid upfront, unlike margin trading, which can lead to higher investment costs.

• Short selling is not allowed in delivery trading, so you must hold the shares before selling them, exposing your investment to market risks.

• There is no time limit for selling the stocks held in delivery trading.

• It's important to be well-informed about the type of trading you're doing to avoid potential losses.

Delivery Trading Strategies

Delivery trading strategy are used by investors who aim to hold stocks for the long term to benefit from price appreciation and dividends. Here are some common delivery trading strategies:

1. Value Investing: This strategy involves identifying undervalued stocks that have strong fundamentals. Investors look for stocks trading below their intrinsic value and hold them until the market recognizes their true worth.

2. Growth Investing: Investors using this strategy focus on stocks of companies that have the potential for above-average growth in revenue and earnings. They look for companies in expanding industries or those with innovative products/services.

3. Dividend Investing: This strategy involves investing in stocks of companies that pay regular dividends. Investors seek stable companies with a history of paying dividends and aim to build a portfolio that generates a steady income stream.

4. Buy and Hold: This is a passive investment strategy where investors buy stocks and hold them for the long term, regardless of short-term market fluctuations. The goal is to benefit from the overall growth of the stock market over time.

5. Sector Rotation: Investors using this strategy rotate their investments among different sectors of the economy based on economic conditions and sector performance. They aim to capitalize on the growth potential of specific sectors at different stages of the economic cycle.

6. Contrarian Investing: Contrarian investors go against the market trend by buying stocks that are currently out of favor with the market. They believe that these stocks are undervalued and will eventually rebound.

7. Quality Investing: This strategy involves investing in high-quality stocks of companies with strong fundamentals, such as solid earnings growth, low debt, and high return on equity. Investors focus on companies with a competitive advantage and a history of consistent performance.

It's important for investors to research and understand these strategies before implementing them, as each has its own risks and considerations.

Frequently Asked Questions

What Is Delivery in Stock Market?

In the stock market, delivery refers to the process of transferring shares from a seller to a buyer.

It signifies actual ownership of the shares, with the buyer holding them in their demat account beyond the current trading day.

Delivery trading is distinct from intraday trading, where shares are bought and sold within the same trading day without actual transfer of ownership.

What Is Delivery and Margin in Stock Trading?

Delivery Trading: Buying and holding stocks for more than one trading day, with the actual delivery of shares to your demat account.

Margin Trading: Trading with borrowed funds from your broker to increase your buying power, allowing you to buy more shares than you could with your own funds. This involves paying interest on the borrowed amount and carries higher risks.

Key Difference: In delivery trading, you fully own the shares, while in margin trading, you trade on borrowed funds, which amplifies both profits and losses.

What Is Square Off in Delivery Trading?

Square Off: Closing out an open position in delivery trading by selling the same quantity of shares that were bought, effectively ending your ownership of those shares.

Purpose: Square off is typically used in intraday or derivative trading to close positions before the end of the trading day, but it's not a common practice in delivery trading where shares are held for the long term.

Settlement: Unlike in intraday trading where positions must be squared off before the market closes, in delivery trading, there's no need to square off as you intend to hold the shares beyond the current trading day.

Share Market Delivery Tips

Research: Conduct thorough research on the company before investing in its shares for delivery, focusing on its financials, management, and future growth prospects.

Long-Term View: Take a long-term view and invest in fundamentally strong companies with a history of consistent performance, rather than trying to time the market for short-term gains.

Diversification: Diversify your portfolio across different sectors and industries to reduce risk, and consider averaging your investments over time to mitigate the impact of market volatility.

What Is Delivery Trade?

Ownership Transfer: In delivery trading, actual ownership of shares is transferred from the seller to the buyer, with the shares being held in the buyer's demat account.

Long-Term Investment: It involves buying shares with the intention of holding them for an extended period, usually more than one trading day, to benefit from potential long-term price appreciation.

Settlement: Settlement in delivery trading occurs on a T+2 basis, where the shares are delivered to the buyer's demat account two days after the trade date.