You’ve probably heard of day trading, which involves purchasing and selling shares on the same day. Delivery trading, on the other hand, involves transferring shares to your demat account and holding them for months or years. And guess what? BTST Trade is a mixture of these two!
BTST (or Buy Today, Sell Tomorrow) allows you to profit from market swings that occur overnight.
In this article, we will look over BTST trading in detail, beginning with what it implies and the regulations that regulate it.
What Is BTST Trade?
BTST, or Buy Today, Sell Tomorrow, is a kind of trading in which you buy a stock and then sell it the next day. It enables traders to capitalize on short-term price volatility in stock markets.
The shares are thus sold before settlement, which is now T+1 days in India. Essentially, the shares you purchased never make it to your demat account. There is a catch, though.
When you sell shares, you will receive an equal amount in your trading account. Due to SEBI regulations, you are not permitted to utilize that amount in a BTST trade on the same day, or immediately. You will need to wait till the next day.
Understanding Mechanism Of BTST Trade
Now that you’ve learned about BTST trading, let’s look at how it works. BTST trading falls between delivery and intraday trading.
When you buy shares in the stock market through delivery trading, the stock is delivered within T+1 days. The letter T represents the trading day.
On the other hand, the seller will receive credit on T+1 day. So, if a stock’s price rises before T+1 day, you cannot take any action.
In intraday trading, you buy and close the position on the same day. However, if there is a possibility of a price increase, you should keep the position. In this case, you can use BTST the next day before stock delivery to take advantage of market volatility.
Let us illustrate BTST with an example. You purchase 100 shares of ABC firm for ₹500 on Monday. Sell these shares for ₹600 on Tuesday. You gain a profit of ₹10,000.
You cannot use the credit gained after selling your BTST stock on the same day due to the latest SEBI requirements. But, again, as mentioned above there’s a catch!
SEBI’s Regulations
SEBI has laid down the following regulations for BTST trade:
1. SEBI approved new trading margin restrictions, which came into effect on September 1, 2022. This new rule requires you to hold 40% of the upfront margin for BTST trading. Buying and selling margins are both 20%. If you do not maintain this, you will face a penalty.
2. If a seller in BTST sells a share but is unable to deliver it, he must pay the auction penalty. This penalty ranges from 0.5% to 1% and can go as high as 20%. This is consistent with the short-selling guidelines.
3. Brokers do not give margin facilities for BTST. To purchase the shares, you must deposit the total amount.
Pros & Cons. Of BTST Trading
| Benefits of BTST Trading |
|---|
| 1. It allows you to profit from short-term volatility or stock price fluctuations. |
| 2. Since shares are not credited to your demat account, BTST trades are exempt from Demat Debit Transaction Fees. The top trading accounts at reputable financial institutions such as Kotak Securities adhere to this practice in letter and spirit. Traders do not have to worry about high fees. |
| 3. If you discover that intraday trading is unprofitable, BTST will extend your transactions for an additional two days to improve performance. |
| Disadvantages of BTS Trading |
|---|
| 1. Unlike intraday trading, the majority of stock brokers do not provide margin for the BTST service through their trading accounts. The orders are cash and carry. As a result, the individual is responsible for paying the entire cost of the transaction. |
| 2. Another disadvantage of BTST is its short delivery time. Assume you purchased 200 shares of BTST today and sold them the next day. What happens if the trader who sold you the shares fails to deliver them? The transaction will surely have a negative impact on him. The exchange will auction the shares, imposing a penalty of up to 20% of the share price. Your shares will be credited the next day or T+3. |
| 3. The price spike at the end of a trading session may be caused by the market’s reflexive response and may not last until the next session. |
Picking BTST stocks
The best BTST stocks are those that are about to get an upward breakout. For example, if XYZ’s stocks were trading at Rs 110 at 3 p.m. and subsequently rose to Rs 115 at 3:15 p.m., the probability of a price breach increases. In this case, traders may opt to employ the BTST trading strategy for the following day’s trading session, when the price rises.
Read Also | Stock Market Orders: Navigating Types for Successful Trading
Common BTST Trading Strategies
In addition to selecting stocks for their BTST transactions, individuals should be knowledgeable with technical trading and market news in order to predict price fluctuations. The following are some of the top BTST trading methods to implement.
1. Price breakouts on candlestick charts
The 15-minute candlestick trading chart is an effective tool for discovering BTST stocks. It shows the share’s high, low, closing, and opening prices. After 2 p.m., when intraday traders begin closing out their positions, the final leg of the trading session sees the most price action. When a stock price rises over the resistance level between 3:00 and 3:15 p.m., it indicates an upward trend for the following trading day. The equities may be held for BTST trading.
2. Put a stop loss in place
Although the BTST strategy may yield attractive gains, traders should use caution when employing it. It is recommended to set a stop loss. You should set a limit at which you will sell the share to avoid further losses if the price of your stock declines the next day.
3. Investing before of a major event
One of the best times to use the BTST technique is right before an expected event that could cause stock market volatility. This can include things like company performance reports, RBI policy releases, election results, major corporate announcements, and so on. In such cases, corporations’ shares rise in the short term. This makes it suitable for the BTST trading method.
4. Trade Selected Highly Liquid Stocks.
BTST demands rigorous stock price monitoring. To efficiently follow stock movements, traders should limit their trading to two to three equities at a time. Furthermore, it is recommended to invest in highly liquid shares such as large-cap businesses, index-based stocks, and so on, which are traded in enormous volumes on a daily basis. This is because the trader must close out the position the next day.
5. Book Profits After Achieving Your Targets
Greed and fear are the primary deterrents to stock market investing. It is recommended that you set an entry price and a goal level before trading. To prevent losing all of their wins due to a market reversal, traders should book profits once they reach their target price and keep their greed under control. Small gains are preferred over no gains. A trader should closely monitor the stock and modify their stop loss if they anticipate the share price will rise further. Once you’ve reached your chosen profit zone, use a trailing stop loss.
Conclusion
The concept of capitalizing on overnight price fluctuations in securities is an important component of the BTST trading approach. It has risks and obstacles, despite the promise of quick gains and the way it leverages the settlement cycle to the trader’s advantage. Before investing in BTST trading, traders should consider market volatility, liquidity, brokerage fees, and regulatory considerations.
As with any trading strategy, BTST trading requires a thorough understanding of market dynamics, a methodical approach, and an acceptance of the risks involved. You’ll also need a solid online trading account. Before beginning BTST trading, traders should assess their risk tolerance, develop a good trading strategy, and stay current with market changes.