As a trader, you must have often come across a term called BTST. BTST trades, or Buy Today, Sell Tomorrow, means that you buy today and sell it on the next trading day.
Unlike intraday trades, BTST trades do not happen within the same trading session. BTST trades, as their name suggests, can be bought during a trading session, held onto, and sold on the T+1 date.
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While they let you take advantage of market conditions, they come with certain risks, which we shall discuss in this blog.
There are two major types of trades based on when you sell your shares. Intraday trades are those that have to be settled during a trading session. Cash market trades lie on the side of the spectrum. Herein, you can conduct a sell transaction only after the shares are deposited in your DEMAT account, which takes two trading days. You can conduct your transactions once the two-day period is over and you are in possession of the shares.
BTST trades were created to act as a middle-ground between these two sides. Unlike intraday trading, you are not forced to sell your shares on the same day. And unlike cash trades, you don’t have to wait for two days in order to conduct the trade.
In a BTST trade, you purchase some shares during a trading session. It allows you the option to hold on to them for the rest of the session. You can then sell the shares on the T+1 day after observing the changes in the market.
While BTST is a very convenient way of dealing with the shortcomings of both intraday and cash trades, such convenience comes with certain risks. Let us take a look at some of the risks that are associated with BTST:
1 .A price rise in one session of the market may not carry over to the next session. This could lead to an overall loss when compared to intraday trading.
2. The biggest risk associated with BTST is short selling. These trades happen without shares actually settling in your account. If the seller defaults on the delivery of the stocks on time, you won’t be able to meet your obligations as the seller. In such cases, you also face the risk of an auction penalty. You can be charged up to 20 per cent of the value of the short-sold shares. Let us see how this issue is solved:
3. When a stock seller defaults on delivering the stocks to the buyer’s demat account within the predetermined time frame, it is termed as short-selling or short delivery.
4. In the event that the seller defaults, the exchange conducts an auction on the T+1 day by using the closing price of T day as the auction price. There is a 20 per cent upper and lower limit on the price of the auction.
5. The exchange then is able to deliver the shares to the buyer on the T+2 day.
6. You, as the defaulting seller, will be required to pay an auction penalty that will be collected by the exchange.
7. There are no available margins, hence, you as the trader will have to buy the stock with capital upfront.
Apart from the above risks, there are certain disadvantages associated with BTST. They are as follows:
1. SEBI changed the BTST rules in 2020. You, as a trader, are obligated to pay a 40 per cent margin before you can transact a BTST trade.
2. Unlike in intraday trades, brokers will not provide you with any margin facilities. You have to put up the entire capital in order to purchase the stocks.
BTST is a type of trade used by many investors to achieve great success. It allows traders to benefit a lot from the short-term volatility in the market. While the risks associated with BTST trades may not be significant, they may still cause you unwanted loss. Taking trades in highly liquid stocks is one way to mitigate the risk of short delivery. Staying aware is, after all, crucial for an investor.
Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account