BTST means Buy Today and Sell Tomorrow. If you have ever noticed your broker recommendations then you must be familiar with the word. Everybody wants to become rich and in this race of becoming rich, we sometimes take actions without being familiar with the risks involved. When an investor hears BTST, It feels very good that you can buy a stock today and can sell tomorrow making easily 1-2 % gains.
Please Stop.! Do not take uncalculated risks. First, beware of risks involved with BTST
In India, maybe you are already familiar that stock settlement is T+2 days. Here T refers to the day on which you purchased the stock. Suppose you bought a stock today and will sell it tomorrow. Now stock settlement means that stock will be credited to your demat account at the end of 2 days and will be available to sell from 3rd day.
What happens if you sell a stock before T+2 day?
When you do that you are at risk of short selling. Which means that you selling a stock before even it gets credited to your demat account. If you do so then you are liable to give stock on T+2 day and by chance, you do not have stock until the end of the T+2 day. You can face a huge penalty.
How can someone fail to deliver the stock until T+2 day?
Yes, another party can fail to deliver the stock if he was not able to square off (close) his positions at the end of the trading day. It could be the case that he shorted (sold) the stock and it remained shorted until the end of the day. In most of the cases, most brokers have a system installed which automatically square off (closes i.e. buybacks shares) your positions so that such cases do not arrive.
What happens when someone short sells a stock?
In case of short sell, Stock exchange will engage an auction (2:00 pm-2:45 pm) for that stock. They will buy the stock at the current price and the difference in the price is paid by the investor who was not able to deliver the stock at the end of the day.
Sometimes the difference in price could be huge and this penalty is paid from the defaulted investors pocked.
How are you at risk?
Suppose you planned to do BTST and bought stock on Monday. Now you sell the stock on Tuesday. The other party from whom you purchased shares on Monday, fails to deliver to you end of Wednesday then unwillingly also you are involved in the short selling of the stock. Now, after the auction, the stock will be delivered to you on Thursday (T+3 day). The exchange will apply a penalty to you as you do not have a stock which you sold.
Precautions for BTST?
Avoid doing BTST trades in the time of extreme market volatility. Also, avoid when some big news is coming regarding the stock.
So guys, whenever next time you do BTST trade please keep the risk involved in the mind. It is better to be safe than sorry.