How can intraday trading be done when settlement takes two days?

Question

When I buy a stock on the NSE in India, it takes two days for settlement (T+2). Therefore I can only sell that share after two days after the purchase date.

Then, how does intraday trading occur (buying and selling in a single day)? I will not be the owner of that shares on same day so how can I sell them then? How can I sell the shares that I do not yet own? Do I buy and sell the share to and from my broker without waiting for settlement of the shares?

Secondly, if I can do intraday trading then why it is called dangerous to buy today and sell tomorrow (BTST)?

Answer 1

T+2 refers to the two day time limit for the exchange of cash and shares between the buyer and the seller.

When you buy the stock, you own it. You can sell your shares any time you want but you must wait until settlement to use the cash proceeds for another purchase. If you do not, in the US this is called free riding and will lead to account restriction.

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Per Joe Taxpayer's comment requesting additional information:

If you buy a security in the U.S. then you can sell it any time that you want whether it be seconds or months/years later.

A cash account allows you to use the available cash. That means that with T+2, the funds from a sale will not be available for two days. There is no limit to how many day trades you can make in a cash account as long as you use settled funds. For example, if you have $10,200 in your account and you pay a $10 commission per trade, in the same day you can make 10 different purchases for $1,000 and then 10 sales, in any order that you want. With a $20 round trip commission, you have used up all of your settled funds and you will have to wait 2 days until the trades settle and the funds are back in your account.

If you make more than 3 option or equity day trades in a rolling 5 business day period in a margin account, provided the number of day trades is more than six percent of the total trading activity for that same five day period then you are considered to be a Pattern Day Trader. Then, you must maintain a minimum equity of $25k in a margin account on any day that trades are made and it must be in the account prior to the day trading. If account value drops below $25k, no day trades will be allowed until the account is restored to the $25k minimum equity level. So realistically, you need a bit more than $25k to maintain the minimum.

A PDT is allowed intraday to trade four times the maintenance margin excess in the account as of the close of business of the previous day but must revert to the standard 50% overnight margin by the end of the current day. Brokers have the right to set more restrictive levels of margin (less than 4:1 leverage) and securities like leveraged ETFs require more margin.

IOW, there is no T+2 settlement. For lack of a more precise financial description, you are effectively borrowing the money from your broker until settlement but there is no margin borrowing charge.

Answer 2

Stocks with good standing are listed as Rolling Stock. This means that although you physically don't hold the stock you can sell. The exchange and brokers manage this; the stock is notionally credited and then sold.

Stocks of less standing are sold as T2T segment. This means you can't sell it before you actually receive the delivery.

Intra day trading is more risky as you are trying to gauge small swings in market. For it to result in money you have to trade in large volumes. A adverse swing can wipe out any gains q

Answer 3

With T+x obligation to pay for the stock within the time frame, it means that you own the stock. If you sell the stock before the clearing date, you pay/get paid the difference. High-frequency trading works the same way except that it happens in a fraction of a second (not applicable to a country with trading on only one stock exchange)

Intraday trading is not recommended. Brokers love if you do it since they earn a commission on every trade.

Intraday trading is considered hazardous. This is explained in this white paper: Trading Is Hazardous to Your Wealth. (Beware of any person or fund brokers tell you that "We are going to win so much you may even get tired of winning and you'll say please, please".

Answer 4

There are two types of ownership when it comes to stock (at least in common-law jurisdictions).

You can own legal title (this is what you have after the two days have elapsed and the trade has settled). You can also have a 'beneficial interest' - the title is still held by someone else, but you gain the benefit - for example, if the stock price goes up, you can sell it prior to settlement. This is what you have prior to settlement.

There are some subtle differences between the two, such as:

1. The holder of legal title is the only one entitled to receive dividend (which is reflected by the market pricing in the value of the dividends when it becomes clear that a buyer of the stock would not receive them).

2. Many tax systems only look at settled transactions with regard to which tax year they fall in. You could potentially make (or lose) money for the next tax year by trading two days before it began.

You may not receive the cash from the sale until settlement (and you may not have to pay until settlement either). However there are various rules governing how the broker handles these situations in different jurisdictions. Obviously if you have a beneficial interest that is almost as good as holding title, so they may be willing to lend you money using the beneficial interest as collateral.