BTST Trading: Meaning, Strategy, Formula and More
BTST, or Buy Today Sell Tomorrow, is a trading strategy to make money from short-term stock market opportunities. In this article, we will discuss BTST trading, it’s formula, its associated advantages and hazards, and tips on maximizing profits by taking advantage of these brief stock openings.
What is BTST Trade?
BTST trading (buy today, sell tomorrow) is a way of stock market investing where you buy shares on one day and then sell them the next day. In this type of investment, investors benefit from short-term price movements to make profits quickly without holding on to stocks for a longer time period.
BTST trade meaning is incomplete without mentioning the importance of a stock’s liquidity in the process. It refers to how the stock prices are not greatly affected by the rapid buying and selling of the stock’s shares. However, if the markets are volatile, this form of trading can result in significant losses. Let’s take an example. Suppose a trader bought 100 shares of company ABC at Rs. 170. In the subsequent trading session, they sold these shares for Rs. 180 each. This resulted in the said trader making an immediate profit of Rs 1000 before their delivery was received into the demat account.
You can learn more about this form of trading by taking a detailed look at the stock market trading course.
4 Best BTST Trading Strategy
Utilizing a BTST strategy can be an effective way to capitalize on profitable opportunities in the stock market. However, it is important for investors to keep risk management strategies at the forefront of their portfolios in order to prevent substantial losses when unexpected volatility strikes. These strategies include:
Also Read: Trade Cycle Definition
1. Candle-Stick Chart Analysis
This helps ascertain short-term price trends of particular stocks. These charts include four major points: opening, closing, high, and low prices, and allow traders to identify whether a stock is exhibiting bearish or bullish tendencies.
2. Go for Liquid Stocks
Liquidity in the stock market refers to how easily tradable the stock is. To determine liquidity, investors must look into the following factors:
- Difference Between the Bid/Ask Prices: If this difference varies significantly from similar stocks, this could mean lower liquidity levels than desired.
- Available Trade Volume Over Time: This indicates how much trading activity (liquidity) exists around a given stock.
3. Using Stop Loss to Minimize Risk
It allows you to put limits on both how much profit and loss you are willing to accept with each particular investment position. A stop-loss acts as an automated exit plan if markets move against your favor. Implementing a stop loss for BTST trades greatly reduces overall risks associated with day trading.
4. Staying Informed on Current Affairs
Developing abilities to stay informed on all aspects that may impact stock market performance can give investors short-term earning opportunities. This includes:
- Being aware of political troubles
- Financial performance of companies
- Mergers and acquisitions
- Changes in central government regulations
BTST Trading Formula
To gain a better understanding of the formula of BTST in trading and how it works, consider this example.
- On Monday, you invested INR 10,000 to buy 10 shares of X Ltd. at the rate of INR 1,000 per share.
- The stock delivery will be received in your demat account on Wednesday. But, if you want, you can choose to sell them before they get delivered to your demat account.
- Let’s say you sold the shares at INR 1200 per share with the total amount being 12k. This is obviously higher than what it was initially bought for, i.e., 10K. Therefore, you make a profit of INR 2000.
- On Tuesday, the day of the sale, you can use 80% of the sale proceeds to buy new stocks. For example, in this case, 80% of INR 12,000 is INR 9,600.
- The remaining 20% balance from the INR 12,000 which is INR 2,400 will become available for buying new stocks on Thursday.
It is important to be aware that you will not have access to the money generated from selling your shares until it has been credited to your account. Therefore, when attempting to purchase new stocks on the same day, only 80% of these sale proceeds can be used. The remaining 20% will remain as a margin with your broker until all funds become available.
Also Read: What is LTP in Share Market
Advantages of BTST
There are numerous advantages associated with this trading. They include:
- You can take advantage of short-term price fluctuations in the stock market.
- If you have executed an intraday trade but think it won’t be profitable by the end of the day, you can convert your order into a BTST and wait to sell until tomorrow. This will give you more time to benefit from favorable movements on the stock exchange.
- It reduces transaction fees associated with regular buy/sell trades.
- There are no demat debit transaction charges for BTST transactions since shares aren’t added automatically to your demat account.
- It gives traders access to up to 80% liquidity using sale proceeds made from same-day.
Disadvantages of BTST
Despite the numerous advantages of BTST in trading, it also has some disadvantages. They are as follows:
- If your account does not have enough funds, any trades you make using the BTST scheme will incur a margin penalty fee.
- Many stockbrokers do not offer BTST services. Instead, they conduct transactions as Cash and Carry (CNC). You may need to pay CNC order fees that vary between brokers.
- The shares are not actually settled in your account in BTST trading. Therefore, if the seller is unable to deliver their shares on the settlement date, you will not be able to meet your obligation as a seller and provide the intended stocks for sale. It will, thus, make you liable to the auction penalty.
Conclusion
BTST trading can be a very profitable form of day trading when executed correctly. In this blog, we have covered what is BTST trade, the best strategies associated with it, the formula for BTST in trading, and the advantages and disadvantages of this trade. We hope you understand the associated risks and can take advantage of the potential opportunities of BTST trade.
Another popular trading method, intraday trading, involves buying and selling shares on the same day. You can check out this blog on intraday trading to learn about a new method of trading with this guide about its strategies, features, and more.
FAQs
BTST (Buy Today, Sell Tomorrow) trading is a relatively safe form of day trading. However, there are some risks associated with it, such as market volatility which can quickly disrupt your plans and lead to losses if you don’t have an appropriate exit strategy in place.
Yes, you can sell BTST shares. Through a brokerage account, an investor can purchase BTST stocks during trading hours. Then, place a ‘sell’ order anytime during the trading hours the next day to liquidate their position prior to the settlement date.
Yes, BTST in trading can be profitable. However, results may vary depending on several factors, such as market conditions and the trader’s level of expertise.
Though both strategies have their own advantages, BTST fares better in two aspects. You can take advantage of the short-term price fluctuations in the stock market with BTST. Also, if you have executed an intraday trade but think it won’t be profitable by the end of the day, you can convert your order into a BTST and wait to sell until tomorrow.
For BTST trades, liquid stocks are good. Avoid choosing speculative stocks or the ones that are susceptible to being used for price manipulation. Use candle-stick chart analysis to see which stock is exhibiting bearish or bullish tendencies.
The auction penalty in BTST is the amount the defaulter has to pay for the non-delivery of shares after selling them. The shares are bought in the auction market by the exchange. The penalty charges can be as low as 0.5% to as high as 20% of the short-delivered stock.
The SEBI’s new margin rule will considerably affect how one can use the sale proceeds from the BTST. According to the rule, the proceeds of the sale will be considered for margin obligations only if the shares are blocked for Early Pay-In or EPI. In the case of BTST, there will be no shares in the holdings to block for EPI. Hence, proceeds from the sale of BTST trade will not be useful on the same day.
