Cash trading also is known by delivery based trading is one of the methods of stock market trading that is often seen in a major portion of long-term investors who trade shares in cash segment by providing the capital needed to fund the whole transaction without relying on the margin. It has often seen that long-term investors take certain interests in equity cash trading rather than traders who are looking for short-term profits.
In this article, we will discuss the advantages and disadvantages of cash trading which are as follows:
Pros: Cash Trading/Delivery Based Trading
The biggest advantage of cash trading or delivery based trading is there is no set limit for buying or selling the stocks, unlike derivatives trading where you have to square-off your position before the expiry date. For instance, in options trading, the traders come in a one-week contract where they are mandated to square-off their positions before or on 7th day (expiry day). Similarly, in margin trading, the traders can use the margin money for intraday trading and have to square-off their positions within the same day whether they are in profit or loss.
This is what gives the edge to the beginner investors who do not have to worry about the time decay and can continue their trade until they get the desired profit.
Another benefit of investing in cash trading is that the investor can control the loss of trade even if the prices go down. For instance, an investor who bought the share worth of Rs. 1000 in a cash account can only lose the same Rs. 1000 that he invested. Also, the investors can save the other costs incurred with the margin accounts in trading derivatives.
Cons: Cash Trading/Delivery Based Trading
The biggest disadvantage that one can see in doing cash trading is less potential compared to the other forms of trading. To better understand this, let’s take an example:
In margin trading, you can have got the limit by 10X or 20X from your broker. So, if you’ve Rs. 1000 within your margin account, you can trade securities of up to Rs. 10000-20000 for intraday. Let’s suppose an XYZ stock is worth Rs. 10000 and you’ve only Rs. 1000 in your margin account, you can take the margin from your broker and invest in that stock. If the stock price goes to Rs. 11000 within a day then you can make Rs. 1000 on your trade. With just Rs. 1000 you were able to double your profit through margin trading. However, in cash trading, you will need Rs. 10000 to buy that stock.
For example, the share price goes to Rs. 11000 then you will make only 10% profit in cash trading whereas in margin trading you were making 100% profit.
So, if we compare the two scenarios, the same rupee gain in margin trading and cash trading represents a difference in percentage return. On top of that in cash trading, you cannot use your funds without the prior settlement.
Despite this, cash trading is a good way for a beginner to invest in the stock market hassle-free which does not require special skills or deep knowledge of stock investments. An investor who has little knowledge of the stock trading can benefit from cash trading. Hope, this article helped you in understanding the cash trading. For doubts, leave a comment…