What is Square Off in Trading?
Square Off refers to closing an open position in intraday trading before the market closes. In simple terms, if a trader buys stocks during the day, they must sell them before the market closes to complete the transaction and lock in profit or loss. Similarly, if the trader starts selling stocks (short selling), they must repurchase them during the same session to square off the position.
How Does Square Off Work?
In intraday trading, traders buy and sell stocks on the same day to profit from short-term market fluctuations. The process of squaring off involves:
- Buying shares and selling them at a higher price during the day (long position) or
- Selling shares first and repurchasing them at a lower price (short position).
The key point is that both buy and sell transactions must be completed within the same trading session. If a trader fails to square off the position manually, the broker will automatically do it close to the market’s closing time, typically between 3:00 PM and 3:20 PM.
Advantages of Squaring Off in Intraday Trading
- Quick Profits: By taking advantage of daily market volatility, traders can earn profits quickly.
- No Demat Account Requirement: Intraday trades avoid settlement delays since the stocks are not transferred to a Demat account.
- Minimizes Overnight Risk: Squaring off positions within the same day eliminates risks associated with overnight price changes.
- Leverage Benefits: Brokers typically offer higher leverage for intraday trades, thus enabling traders to take larger positions with relatively little capital.
Essential Points About Square Off
- Mandatory Closure: All intraday positions should be closed before the market closes. The broker will auto-square off the position if the trader does not close it manually.
- Brokerage Charges: When the broker auto-squares off a position, an additional fee may be charged to the trader.
- Timing: In India, squaring off usually happens between 3:00 PM and 3:20 PM, before the market officially closes at 3:30 PM.
- Settlement Style: Squaring off ensures that no actual share delivery occurs. Profits or losses are settled in cash based on the difference in buy and sell prices.
Types of Square-Off Positions
- Long Position Square Off:
- Buy First, Sell Later: A trader buys shares to sell them later at a higher price during the day.
- Short Position Square Off:
- Sell First, Buy Later: A trader sells shares they don’t own (short selling) and repurchases them later at a lower price to profit from the fall.
Why is Squaring Off Important in Intraday Trading?
Squaring off ensures that traders don’t carry over any positions overnight, which could expose them to risks from after-market events or news. It also helps brokers manage liquidity and avoid issues with the settlement, as intraday trades are cash-settled by the end of the day.
