This approach is commonly used by retail investors who prefer simple transactions without borrowing funds or leveraging their positions.
Cash trading refers to a type of trading where the settlement of securities is made entirely in cash. In this system:
Investors pay the total value of the shares upfront when buying.
No margin or leverage is used to finance trades.
Securities purchased are fully owned by the investor once settled.
Cash trading is often preferred by conservative traders and beginners as it involves lower risk compared to margin trading.
To understand cash trading, it is important to look at how the process typically works:
Investor places a buy order for stocks in the cash market segment.
Full payment for the shares is made upfront to the broker.
Settlement occurs as per T+1 or T+2 cycles, depending on the exchange.
The investor becomes the full owner of the shares after settlement.
Similarly, when selling shares, the investor must already hold the shares in their demat account, and the proceeds are credited after settlement.
Cash trading has certain unique features that distinguish it from margin or derivatives trading:
Full Payment Required: Investors cannot use borrowed funds.
Lower Risk: Since no leverage is involved, losses are limited to the invested amount.
Ownership of Securities: Shares are delivered to the investor’s demat account.
Settlement Cycle Dependent: Trades are completed based on the exchange’s settlement rules.
Engaging in cash trading offers several benefits:
No Debt or Interest: Since no borrowed money is involved, investors avoid interest costs.
Simpler for Beginners: Easy to understand for those new to trading.
Lower Risk of Losses: Exposure is limited to the capital invested.
Suitable for Long-Term Investing: Investors own the shares and can hold them indefinitely.
Despite its safety, cash trading has certain drawbacks:
No Leverage: Traders cannot amplify returns using borrowed funds.
Limited Buying Power: Investments are restricted by available cash.
Slower Capital Growth: Potential returns may be lower than margin or derivative trading.
Suppose an investor wants to buy 100 shares of a company trading at ₹500 per share:
Total Investment = 100 × 500 = ₹50,000
The investor pays ₹50,000 upfront to buy these shares.
Once the trade is settled (T+1 or T+2), the shares are credited to the demat account.
If the share price rises to ₹520, the investor can sell and realise a profit of ₹2,000 (excluding charges)
Here’s a simple comparison:
Feature | Cash Trading | Margin Trading |
---|---|---|
Payment |
Full upfront |
Partial, broker funds rest |
Ownership |
Immediate |
Conditional until repayment |
Risk |
Limited to investment |
Higher due to leverage |
Suitable For |
Beginners, investors |
Experienced traders |
Cash trading is the simplest and safest way to participate in the equity markets, while margin trading is for those willing to take higher risk for potential higher rewards.
Cash trading is a straightforward method of investing in the stock market where trades are executed using available cash only. It offers simplicity, safety, and ownership of securities, making it ideal for beginners and risk-averse investors. However, the growth potential is limited compared to margin or leveraged trading.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Yes, in cash trading, you fully pay for the shares and take delivery in your demat account.
No, cash trading does not involve borrowed funds or leverage.
You can hold them as long as you want since they are fully owned by you.
Yes, because there is no leverage, and your loss is limited to the invested amount.
Yes, you can do intraday trades in the cash market, but positions must be squared off the same day unless you opt for delivery.