What are the Risks Involved in BTST

Every trader has come across the BTST (buy today, sell tomorrow) strategy by now. In India, it's a short-term strategy allowing the buying of stocks today and selling the next day. This process is complete before delivery to the demat account. It helps to maximise short-term price fluctuations and reduce transaction costs. Although this sounds enticing, BTST trading has its share of risks and repercussions.

An increasing number of investors look forward to trying this trading method as they debut on the stock market, fresh after a course. This blog shares the various risks this lucrative trading strategy holds.

What is BTST Trading?

This in-demand technique involves buying and selling stocks usually the next day. It happens before the stocks even reflect in your demat account.

Given the short time frame and reduced monitoring, people are growing increasingly aware of this method. It does take skill and exceptional research to pick out a BTST stock.Stock market learning courses help individuals benefit from better skills and decision-making.

While they deeply cover the incentives of such a trading method, they also delve into some gloomy features it holds. Apart from poor decision-making skills, a few other risks exist for traders who exercise BTST trading activities.

1. Extreme Price Volatility

This stock market strategy is solely dependent on short-lived price fluctuations. In most cases, these prices are uncertain and unstable. An assortment of factors can cause sharp declines in stock prices, causing immense losses.

Overnight geopolitical news or negative company media can cause upsetting impacts. It exposes the wagering nature of buy today, sell tomorrow trading.

2. Risk of Short Delivery

This stock market technique is time-sensitive, and a window to close the transaction exists. That said, there is a risk that the seller cannot deliver his end of the deal in time. The term for the situation is short delivery and incurs costs for the buyer.

The buyer must pay extra as the delay attracts a price change. The excess costs could range anywhere from a few percent more to 20% more! This penalty fine is commonly known as an auction penalty.

If you are a BTST trader, we suggest you prepare yourself for these penalties as a precaution.

3. Liquidity Concerns

Liquidity refers to the ease of selling or purchasing a particular stock. Sometimes, BTST trading presents a liquidity issue that may dissuade traders.  

Low liquidity arises from low volumes of stock, preventing trading at a convenient price. Even the best SEBI research analyst in India knows how the vital role stock liquidity plays. That is why they would advise you to assess liquidity levels before investing.

Investing in stock with low liquidity can leave you stuck with stock as you can't find a buyer. Investing large sums in stocks with low liquidity is another hazard connected with this trading technique.

4. No Control over External Factors

Endless internal and external factors influence stock prices. Most of these external factors are out of your control. Government policies and global markets are a few of these uncontrollable aspects.

It takes an overnight movement of any of these factors to impact the Indian stock market. Even fluctuations in commodities and international stocks can set off a chain reaction.

Also, to add to this point, the stock market is quite volatile and influenced by commodity and exchange rates. So, if the local currency slips, the stock market probably will.

5. Selection of Appropriate Stocks

It takes skilled expertise for an investor to select the stock with the most potential. Analysing price charts for a considerable time is also crucial. Even then, many traders may not make the desirable and profitable selection.

Fortunately, a solution arises through a research analyst who provides valuable help. A BTST calls provider analyses stocks and gives expert insight into what stock will bear profits.

6. Legal and Regulatory Risks

Every BTST trade must adhere to the strict regulations enforced by the SEBI (Securities and Exchange Board of India) and individual stock exchanges. However, this is not as simple and regulations for trading and investing can change regularly.

Any immense change can result in additional losses, which means lower profitability. For example, hikes in transactional or brokerage costs can reduce profit margins. It makes the buy today, sell tomorrow trading method less impactful and alluring.

Conclusion

So, while the BTST trade method is alluring due to its short-term nature, it comes with risks. Understanding these risks is imperative to position yourself to manage them. A few examples of these risks are short delivery, liquidity risks, and uncontrollable external factors.

With an expert to guide you or a stock market course that covers risk management, you can guard against BTST risks. As a trader making conscious decisions, it is vital to understand the possibilities beforehand.