All About Day Trading

Day Trading is the act of buying and selling securities intra-day with the expectation of making fast profits within minutes to hours. Popularized during the bull market of the late 1990s, day trading is the practice of buying and selling stocks over a very short period of time, typically one day. Once the domain of floor traders and investment banks, the availability of inexpensive computers and fast Internet access has brought day trading to the masses.

Day traders come in all shapes and forms, using mechanical to systematic day trading systems, and can place anywhere from one to thousands of trades per day.

Day trading strategies typically follow one of two approaches: beating the spread or attempting to catch short term trends. The spread is the difference between what is being offered for a stock (the bid) and the price being asked for the stock (the ask). Spread trading attempts to buy at the bid and sell at the ask, over and over again. Spread traders may make hundreds or even thousands of such trades a day. With the advent of spreads as low as one penny, spread trading has become much less profitable than it once was.

Counter-trend traders will look for signs that a stock is topping or bottoming out before they place a trade in the opposite direction. For example, reversal traders use tools such as the TICK, TICKI, Put Call Ratio, volume, etc. to anticipate a change in trend.

The term “day trading” is a widely misused and misunderstood term. Real day trading means not holding on to your stock positions beyond the current trading day; in other words, not holding any position overnight. This is really the safest way to do day trading because you are not exposed to the potential losses that can occur when the stock market is closed due to news that can affect the prices of your stocks.

Unfortunately, many people who claim to be “day trading,” hold stocks overnight because of fear or greed, thus setting themselves up for the catastrophic elimination of their capital. When day trading currencies, the term “day trading” changes slightly. Since currencies can be traded 24-hours-a-day, there is no such thing as “overnight” trading. Thus, you can have open positions for longer than a day with active stop losses that can be activated at any time.

Day trading is an investment tactic that does online daily stock trading with a relatively short investment. Those who do day trading usually buy and sell securities during the same market day and, as a general rule, do not hold stocks overnight. Many day traders make dozens of trades every market day hoping to capture profits that arise from small intraday price fluctuations..

You basically watch the stock market all day long, buy and sell multiple times throughout the day, trying to buy it low and selling it high and then rebuying it when it drops back down, etc. Very dangerous, and hard to do. Studies have shown day traders do worse in the long run than buying stocks and holding onto them for longer terms. Plus you have to pay commission or fees every time you buy and sell, and taxes on your capital gains are higher for stocks held for less than a year.

Why FMPs give better post-tax returns than FDs

Those who invest in fixed income securities such as bank fixed deposits (FDs) and small savings schemes are constantly looking out for new alternatives that will provide better post-tax returns without significantly compromising on security.

One alternative that they can definitely consider are fixed maturity plans or FMPs offered by mutual funds that typically mature in around one to 36 months.

Sometimes FMPs are also called FTPs or fixed term plans.

The monies collected under such schemes are typically invested in debt products like commercial papers (CPs), corporate debentures, certificate of deposit (CDs), bonds, government securities and even bank deposits.

Typically the investment is in paper that has a minimum security rating (normally not less than AA) that is mentioned in the offer document and hence the safety of the money is reasonably ensured.

How these plans can improve your post-tax returns?

The reasons are mentioned below...

Even if the fund was to invest in bank fixed deposit it gets a much better rate as they are able to place a bulk deposit. As an individual you cannot get such interest rates from the banks.

Also FMPs have fund managers and the bulk funds to get much better yields from the debt market than you have as an individual.

Add the fact that mutual fund structure is very tax efficient for such plans. Typically they do not declare any dividends and are redeemed only on maturity that is longer than a year.

Thus the interest earned by the fund is returned as appreciation in the value of the units to you.

Since the units are held for more than 12 months these are considered as long-term capital assets and you pay tax at a maximum rate of 10 per cent (or 20 per cent after indexation if that is more beneficial for you).

Here is an example to illustrate the point:

If you have Rs 50,000 to invest for around 12 months (and one day) you will at the most get around 8 per cent per annum from a good bank which means your deposit of Rs 50,000 will give you a return of Rs 4,000.

If you are a taxpayer your net post-tax return will work out to Rs 2,764, Rs 3,176 or Rs 3,588 if your marginal tax rate is 30.9 per cent, 20.6 per cent or 10.3 per cent respectively.

Now if you put it in an FMP and the fund house accumulates the savings of many investors like you and invests it back in the same bank or in other equally safe instruments for a period that matches the tenure of the fund (12 months and 1 day in our example) they are likely to be able to get a return of 8.5 per cent which means they will make a return of around Rs 4,250 on your money post tax.

Even after reducing the fund management charge of around 0.25 per cent the return left will still be higher at Rs 4,125, which is still higher than if you had invested on your own.

The real value of course comes from the tax treatment.

Since this will be taxed as a long-term capital gain the maximum tax you will pay is at 10.3 per cent which means the post-tax return in this example will be Rs 3,700 which is higher for all categories of tax payers than what they could have managed on their own.

The actual tax liability could be even less if the indexation benefit is high but since that is a complicated exercise we will ignore the possible benefits from that exercise.

Even in the dividend option where they declare dividends the fund pays a dividend distribution tax of 12.875 per cent for individuals and the dividends are not thereafter taxable in the hands of the recipients.

Thus if you pay a higher rate of tax even the dividend option can be beneficial to you.

This is one of the main reasons why these plans are so popular.

6 checkpoints before buying a mediclaim policy

1. Individual and Family Floater

In individual policies each family member is insured for a specific amount whereas in family floater the whole family is insured for a particular amount. Before deciding on which one to opt for, there are certain points to consider.

In case of family floater, when the primary person insured or the eldest member of the family reaches a specific age, the policy is closed and even the members who are still younger cannot renew the same policy.

The same is applicable in case of death of primary insured. Here the maximum renewability age in case of family floater is also quite less. Also, after a certain age, children cannot be a part of the family floater policy.

The age generally varies from 21 to 25. After this age, children have to buy a separate policy for themselves. Both these conditions leave the family uninsured for any risk arising out of hospitalisation. And it is quite possible that getting insurance at that age is not possible anymore due to various health conditions.

In individual polices, the individual is insured and he is evaluated on individual parameters. The attainment of specific age or death will not impact the mediclaim policy of other family members and their renewability.

2. Renewability age

The life expectancy of an average Indian is increasing due to better health facilities and improved living conditions. Health insurance is something which one needs at a later stage of life much more than when he or she is young.

Although the mediclaim policies are normally only for a period of one year, in actual practice it is a long term relationship with benefits accruing to you as the relationship with the insurance companies progresses. So your mediclaim policies should cover you as you age as it will be difficult to buy a policy from another provider at that age.

If your policies do not cover you at that point of time, then buying such a policy will not give you real peace of mind. Thus, one should always try to buy a policy that provides renewability till lifetime.

Currently only United India, Apollo Munich, Star Health and Max Bupa are offering this facility.

3. Sub-limit

This is one of the most significant clauses in health insurance policies. It might happen that you have taken the maximum sum assured, but at the time of claim you may end up getting only a part of your claim even though the particular treatment was completely covered by the policy.

These kinds of differences are usually related to sub-limits. Sub-limits are broadly categorised under two main sub categories:

The first set of sub-limits is on things like room rent, doctor's fees and medical OT charges.

Suppose your sum assured is Rs 5 lakh and they have a clause of sub-limit which says that they will pay a maximum of 1 per cent of sum assured per day for room rent implying that the insurance company will pay a maximum of Rs 5,000 per day for room rent and anything additional would be paid by the insured. These kinds of sub-limits are not there in all policies so you should prefer policies that do not have such sub-limits.

The second set of sub-limits is on diseases.

There are certain diseases that are covered within the policy but with a certain limit. For example a policy may say that it would cover cataract operation but with a limit of only Rs 15,000. This means that whatever cost you incur due to hospitalisation for cataract, the maximum you can claim is Rs. 15,000.

Most policies will have these sub-limits so understand what these are before taking up a particular policy.

This clause simply means that the bill amount has to be shared between the hospital and the insured in a pre-mentioned proportion.

Again this means that you will not get full value for your sum insured even though the total claim is within the sum insured.

For example if the company has a co-pay requirement of 20 per cent and you have a insurance policy for Rs 5 lakh and the hospital bill is for Rs 2 lakh the insurance company will give you only Rs 1.6 lakh and you will need to pay the balance Rs 0.4 lakh from your own pocket.

This clause is not there in every policy so such policies should be avoided, if possible.

Permanent exclusions are those set of conditions that are never covered by the health insurance policy. Most of these conditions are common across most of the policies. But at times some of them may carry some unusual permanent exclusion that is not similar to other policies.

These exclusions may become quite critical at times. So study the permanent exclusions given in the prospectus carefully.

Temporary exclusions mean certain conditions that are not covered for certain period. For example the policy may say that cataract or knee replacement surgery would be covered only after a period after 2 years.

Almost all policies have these temporary exclusions so you should be aware of what you are getting into.

6 tax-saving tips for working couples

We are just a few months away from the financial year end, and most of us have by now started this year's tax planning.

For a working couple, an efficient tax plan can be achieved by jointly making use of their dual income to invest, and the income tax rules to their advantage. Here are six smart tips from Investment Yogi, to help couples save more and maximise wealth.

1. Using investments efficiently

If spouses fall in different tax brackets, it is advantageous for the spouse in the higher tax bracket to claim deductions from the tax-saving investments, which the couple has invested in together.

For example, let us consider the case where both spouses make investments for a tax deduction of upto Rs 1,00,000, respectively. In case one of the spouses has insufficient investments to fully meet his limit of Rs 1,00,000, then the investments made should be used for a claim by the spouse earning more. In this way, a lesser amount of his salary will be attracting the high tax bracket rate.

When seeking a home loan, it is advantageous for couples to opt for joint loans. By this, spouses can individually claim a maximum deduction of Rs 1 lakh on the principal repayment and Rs 1.5 lakhs on interest payment, for the same home loan.

Thus, together the couple gets to claim Rs 2 lakh principal repayment and Rs 3 lakh interest repayment. The income tax benefits are applicable in proportion to the ownership structure.

For example, if the ownership in a property is 50:50, the loan amount will split accordingly and this ratio will be applicable while calculating tax benefits on interest/principal repaid on this loan.

It is advantageous to make use of one's house rent allowance (HRA) as it is partially exempt from tax, provided rent is actually paid.

If, one of the spouses owns the house, the other spouse could pay rent to him/her, to claim HRA, thereby reducing his taxable income.

If the couple resides in a rented house, the HRA exemption for the rent paid can be shared by the couple.

As per the current rules, LTA benefits can be claimed twice in a block of four calendar years.

While claiming LTA (Leave Travel Allowance), spouses should claim exemption alternately each year. This way, together they can claim an LTA exemption of four journeys in a block of four years.

There is no need for them to take the precaution of not travelling twice during the same year.

Have you and your spouse received gifts that are considered taxable?

Then starting an HUF can prove to be quite a saving. Any income received by an individual as a member of a HUF (Hindu Undivided Family) is taxable only in the hands of the HUF and not in an individual capacity. The HUF income has the same slabs and exemptions as for an individual.

Thus, through an HUF, couples can get an additional, separate exemption of Rs 1,60,000.

Spouses can get additional exemptions by creating a trust as per section 164 of the Income Tax Act.

A private trust can be created for an unborn son or daughter, or for the future spouse of an existing son or daughter, by allocating funds to the trust through transfer of property, rent of which shall be income of the trust.

To conclude...

The Income Tax department gives us various avenues to help save tax. Optimally using these avenues and structuring finances sure does provide a great deal of monetary gain.