Aarav, sat at the lunch table with Amritsari Kulcha and chole on his plate. With eyes firmly on the smartphone, he was awed by the volatility of a stock that has risen more than 3% since morning. He had never indulged in quick trades as his father is very vocal about their high costs and taxes.
“If I had bought 1,000 shares of this share at market open and squared them off right now,” Aarav muttered, shaking his head, “I’d be up by ₹15,000. Rajesh, dropped a spoonful of mint chutney onto the plate of his son. “It looks promising as you are only calculating the raw price movement, Aarav. Real trading isn’t a video game. Before you look at the potential profits, you need to understand the structural asymmetry of the market.”
Intraday Trading Risks
Aarav looked up from his screen. “Asymmetry? It’s just tracking price patterns, buying low, and selling high before the market closes, right?”
“That’s the marketing pitch,” Rajesh said, putting a big Kulcha on his plate, avoiding watchful eyes of his health conscious wife. “But in reality, a retail trader is walking on a tight room, destined to fall. You are trying to compete in an arena where you are fundamentally outmatched.
“Very negative, Dad, but okay let me hear” the son got interested.
The Game of High Speed and Institutional Power
“Think about who is on the other side of that screen,” Rajesh said, leaning forward. “When you place a market order, you aren’t trading against another college student or a retail guy watching soaps on Idiot Box. You are competing against highly enabled traders equipped with best of technologies and tonnes of experience.” Rajesh highlighted critical barriers that can make retail day trading very risky and explained:
Technological Edge
“The modern stock market is dominated by highly advanced technological automated systems working on their own. The biggies of market, trade algorithmically, setup ultrafast computers that are efficiently linked to stock exchange servers. They execute thousands of orders in milliseconds based on complex mathematical models.”
The Execution Lag
“By the time a retail trader sees a price tick on a mobile app, taps the screen, and the order processes over a standard internet connection, an institutional algorithm has already processed the data, anticipated the order flow, and adjusted the price.”
“You are trying to compete with a sports car on bare foot”. Rajesh added.
The Hidden Costs of Intraday Trading
It is not a game where winners and losers are evenly placed. Every single trade trigger some costs. Brokerage, transaction charges, stamp duty, and Goods and Services Tax apply to your traded volume. If you frequently buy and sell, these costs accumulate to make a good dent on your profits, if any.
“So,” Aarav paused, looking at the volatility on his screen, “I am fighting a system that is technologically faster than I am, while incurring costs every time?”
“Exactly,” Rajesh nodded. “And if you somehow survive the technological onslaught to make a profit, the tax department is waiting at the exit door.”
Profits are Taxed at Par with Other Income
Rajesh continued, “Earlier, we talked about Capital Gains. But the moment you switch to intraday trading the things change entirely.”
Under Indian taxation law, intraday equity trading where no actual delivery of shares takes place into your Demat account is categorized as speculative business Income and not an investment. Rajesh summarized the pertinent challenges:
- The gains are added to your regular income and taxed at the applicable slab rates. In case of Aarav who is already in the highest income tax bracket the rate potentially becomes 25%.
- While profits are added to your overall income, losses can only be offset against other speculative business profits. They cannot be offset against any other head of income.
“Wait a minute,” Aarav interrupted his father, a chole filled spoon forgotten in his hand. “So, I add profits to my income from salary to pay taxes, but ignore losses from intraday trading. I cannot use that loss to reduce my taxable salary income?”
“There is more to it,” Rajesh said firmly, “while speculative business losses are ring-fenced. you are allowed to carry them forward for four years to offset from any speculative profits in subsequent years.”
“Thus, I bear that loss completely on my own, and can only offset it if I make a speculative trading profit down the line up to four years.” Aarav commented questioningly.
“Precisely,” Rajesh replied, raising eye brows as Sunita replaced half eaten kulcha with Avocado toast and passed it to Aarav.” Rajesh quipped to his wife “you love your son more.”
The Endgame
Aarav closed the chart app on his phone and sighed. “So, an investor gets lower flat taxes and exemptions, but a trader gets treated like a business, with incredibly strict rules.”
“Yes!” His father added. “The stock market is an incredible tool for building wealth, but you must know the game you are playing. If you choose to trade intraday, you are not merely an investor, you are trying to run a high-risk, speculative strategy against highly skilled individuals and computers.”
If You Wish to Indulge – Take Lower Risks
“However, do not take my words. Try on your own and take a long term decision.” his father mellowed his thoughts as he watched his son take a big bite of Kulcha. “Do not eat more than you can chew, speculate small sums and see the fun. I am afraid, you will be happy being an investor than a trader.”
Read also:
- Know Capital Gains Harvesting – Not to be Missed Opportunity (Click here)
- Capital Gains Tax and Share Market Profits: A Simple Guide (Click here)