Can I Buy Stock Today and Sell Tomorrow? A Complete Guide to BTST Trading

Have you ever spotted a promising stock and thought, “I wish I could make a quick profit on this without waiting weeks or months”? Well, you might be interested in a strategy called Buy Today, Sell Tomorrow (BTST). As an active trader myself, I’ve explored this approach and want to share everything you need to know about buying stocks today and selling them tomorrow.

What is Buy Today, Sell Tomorrow (BTST) Trading?

BTST trading is pretty much what it sounds like – a trading strategy where you purchase shares on one day (let’s call it day T) and sell them the next trading day (T+1), even before those shares are actually delivered to your Demat account.

Here’s the interesting part – when you buy shares in the regular market, they typically take T+2 days (two days after the purchase) to be credited to your Demat account. But with BTST trading, you don’t have to wait for actual delivery before selling. You can sell them the very next day!

As I’ve learned through my trading journey, BTST is different from both

• Intraday trading (where you buy and sell on the same day)
• Long-term investing (where you hold stocks for extended periods)

How Does BTST Trading Work?

For BTST trading to work, a few conditions must be met:

1. Order Type Must Be CNC: Your buy order needs to be a Cash and Carry (CNC) order type. This is the order type used when you buy stocks and intend to hold them overnight or longer. It can’t be an MIS (intraday) or NRML (normal – usually used for futures and options) order.

2. Not All Stocks Qualify: Not every stock can be traded using the BTST strategy. The following types of stocks are typically excluded:

   • Trade to Trade group (T2T)
   • Graded Surveillance Measures (GSM)
   • Additional Surveillance Measures (ASM)

3. Broker Support: Your broker must allow BTST trading. Some brokers may have specific requirements like having Power of Attorney.

Let me walk you through a quick example

Say I buy 100 shares of XYZ company at $10 per share today using a CNC order type. I need $1,000 in my account to execute this trade. Tomorrow, if the price rises to $15 per share, I can sell those shares even though they haven’t been delivered to my Demat account yet. This would give me a profit of $500 (minus any trading fees and taxes).

Key Benefits of BTST Trading

From my experience, BTST trading offers several advantages:

1. Flexibility with Timing: Unlike intraday trading, you don’t need to close positions by the end of the trading day. This gives you more flexibility to wait for better prices.

2. Potential Overnight Gains: Sometimes stocks gap up (open higher than the previous day’s close) due to positive news or market sentiment. BTST allows you to capitalize on these overnight price movements.

3. Save on Demat Debit Transactions: Since the shares aren’t actually delivered to your account before you sell them, you save on Demat debit transaction charges.

4. Leverage Market Swings: BTST can be profitable when the market opens higher the next day, potentially offering better returns than intraday trading.

Risks and Challenges of BTST Trading

I’d be doing you a disservice if I didn’t mention the risks involved:

1. No Margin Benefits: Since BTST occurs in the cash segment, brokers typically don’t offer margin money for these trades.

2. Market Volatility Exposure: You’re exposed to overnight market risks. Sudden global events or policy changes can dramatically impact stock prices when the market opens.

3. Short Delivery Risk: This is a big one! If the shares you purchased aren’t delivered to your Demat account on T+2 day (which can happen for various reasons), but you’ve already sold them to someone else, both you and the original seller will face penalties. This penalty isn’t fixed and depends on how much the stock price has increased.

4. Tax Implications: Profits from BTST are typically considered short-term capital gains, which are taxed at your ordinary income tax rate rather than the more favorable long-term capital gains rate.

BTST vs. Day Trading: Understanding the Differences

Many people confuse BTST with day trading, but they’re quite different:

Speaking of day trading, according to FINRA (Financial Industry Regulation Authority), you’re classified as a “pattern day trader” if you make four or more day trades within a five-trading-day period, provided those trades account for more than 6% of your total transactions by value during that time.

Pattern day traders must maintain at least $25,000 in cash and securities in their investment account and must be authorized to buy stocks on margin from their broker. If you don’t meet these requirements, you can’t complete any day trades until your account reaches that $25,000 threshold again.

How to Select Stocks for BTST Trading

Based on my trading experience, here are some tips for selecting stocks for BTST:

1. Focus on Liquid Stocks: Choose highly liquid stocks, typically large-cap stocks or those that are part of major indices. The main idea is ensuring there will be enough buyers when you want to sell the next day.

2. Look for Strong Technical Setups: Stocks showing strong momentum or breaking out of consolidation patterns often continue their trend the next day.

3. Watch for News Catalysts: Companies expecting important news announcements overnight (earnings, product launches, etc.) might see significant price movements the next day.

4. Avoid Volatile and Penny Stocks: These carry higher risks and may be subject to trading restrictions.

5. Check Delivery Percentage: Stocks with high delivery percentage (percentage of shares actually delivered vs. total traded) tend to be more stable and less prone to manipulation.

BTST Trading Strategies That Work

Over time, I’ve found these strategies particularly effective for BTST trading:

1. Momentum Follow-Through Strategy

• Identify stocks showing strong momentum in the last hour of trading
• Enter positions if volume supports the price movement
• Set a stop-loss below the day’s low (for buys)
• Aim to exit when momentum fades the next day

2. News-Based BTST

• Look for stocks that might react to overnight news
• Enter positions before market close
• Be ready to exit quickly at market open if the news doesn’t play out as expected

3. Technical Breakout Strategy

• Identify stocks breaking out of consolidation patterns near market close
• Confirm with increased volume
• Use the previous resistance as your new support level
• Exit when price approaches the next resistance level

Practical Tips for BTST Trading Success

As someone who’s made both good and bad BTST trades, here are my practical tips:

1. Start Small: Don’t commit large portions of your portfolio to BTST trades until you’ve gained experience.

2. Use Strict Stop-Losses: Always have a predefined exit point to limit potential losses.

3. Don’t Fight the Trend: BTST works best when you trade in the direction of the overall market trend.

4. Check Settlement Cycles: Be aware of holidays or special circumstances that might affect the settlement cycle.

5. Maintain Adequate Funds: Ensure you have enough funds to cover potential losses if the trade moves against you overnight.

6. Monitor Pre-Market Indicators: Before the market opens, check futures, global markets, and any relevant news that might impact your position.

Regulatory Aspects and Broker Policies

Different countries and brokers have varying policies regarding BTST trading:

1. In most markets, BTST is allowed but with certain restrictions.
2. Some brokers require Power of Attorney to facilitate BTST trades.
3. Trading in certain categories of stocks (like T2T) is not permitted for BTST.
4. There may be higher margin requirements or additional fees for BTST trades.

For example, if you’re trading through Enrich Money and you’ve given them Power of Attorney, you can do BTST trading. However, if you haven’t provided Power of Attorney, you won’t be allowed to do BTST.

Tax Implications of BTST Trading

From a tax perspective, BTST profits are typically classified as short-term capital gains. In most countries, these are taxed at your ordinary income tax rate rather than the more favorable long-term capital gains rate that applies to investments held for longer periods.

For active traders, these tax implications can significantly impact overall profitability. It’s advisable to consult with a tax professional to understand the specific implications based on your country’s tax laws and your personal tax situation.

Is BTST Trading Right for You?

I believe BTST trading isn’t for everyone. It’s most suitable for:

• Active traders who actively monitor the market
• Investors with a good understanding of technical analysis
• Those who can quickly react to changing market conditions
• People who have the emotional discipline to stick to their trading plans
• Traders who can afford to take on higher risks for potentially higher returns

If you’re a beginner, I’d recommend gaining experience with regular investing and perhaps intraday trading before attempting BTST strategies.

Final Thoughts

BTST trading offers an interesting middle ground between day trading and swing trading. It allows you to capture overnight price movements without committing to longer holding periods.

However, it comes with its own set of risks and challenges that shouldn’t be underestimated. The short delivery risk, in particular, can lead to unexpected penalties and losses.

As with any trading strategy, success with BTST requires discipline, practice, and continuous learning. Start small, develop a clear strategy, and gradually refine your approach based on your experiences.

Do you have experience with BTST trading? What strategies have worked for you? I’d love to hear your thoughts and experiences in the comments section below!

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