In normal day trading transactions, the traders have to exit the position before the market closes. The only option, traders engaged in online stock trading have is to place multiple orders for leverage, liquidity and risk aversion.
One leverage the traders get here is to hold their orders overnight in the anticipation of market improvement. This is one of the most common practices by intra day traders. They consider it a safe option to avert risk. Though holding day trades does not give a choice of converting the shares into long term investment, it gives you stipulated time to hold shares and wait for the market to improve.
Till now you must have read about the benefits of holding a position overnight. Though it can be beneficial at times, it has multiple risks associated with it. Find some of the major negative impacts of holding the shares when engaged in online stock trading.
1. Huge Gaps
If you are a regular trader, you must have noticed huge gaps in the share prices when the market closed and opened next day. Holding a share overnight in such a highly volatile market takes the situation out of control leaving you with no choice.
The major reason behind the gaps is the news and other market conditions. Do you remember the drastic change in Satyam Computer’s prices in January 2009, which fell down to Rs. 31 from Rs. 188 just in a day. And all this was a completely unexpected movement, which is very common in the stock market.
2. Stop-Loss Order is Ineffective
No doubt stop loss facilitate you against the expected price drops and limit your loss, but this can be of no use in overnight transactions. You must be thinking how can it be possible?
The culprit here is the huge gap. The market might go down, even lower than the point of your stop loss, but everything happens so quickly that your stop loss limit gets lost somewhere. The quick jump in price makes your stop loss ineffective.
For instance, you purchased shares at the price of Rs. 105 and set the stop loss limit at Rs. 102, but the market next day opens at Rs. 100. So, the limit here is completely worthless, making your loss bigger than the expected.
3. Additional Fees
Yes, many online brokers charge additional fees for holding the stock overnight, which further brings down your profits. If you are deeply in love with your stocks and have a strong intuition of making the profit, you can reopen your position next day and pay additional brokerage to the discount brokers.
4. Large Bank Balance
High bank balance is a prerequisite to hold a position overnight. So if you really want to stay in the market even after having the risk of a huge gap, make sure you have enough balance in your account for margin calls.
Margin call allows your broker to sell the assets if your overnight trades and available cash could not cover up the broker’s losses. Though, you can avoid margin calls by depositing more money in your trading account, it does not provide you any returns.
5. Additional Stress
Holding a position overnight means staying in the dilemma whole night. You will always be in stress with the fluctuations in the market. The bedroom where you should relax and get a sound sleep becomes a place to just think about the stocks, price movements and the expected profit or loss.
Day trading as the name suggests is a process of online trading services within the same day. Holding the position overnight just gives you extra burden with huge market gaps, additional fees, unexpected margin call on the opening of the market and above all a stressful night. Holding positions overnight can be a right option, but only for those who understand the online stock market very well and have thorough experience of trading.