Day Trading on Margin

What Is an Intraday Margin?

Day trading, otherwise known as intraday trading, is the practice of selling securities that one has bought within the same day itself with the goal of locking in instant profits from stock price movement. Day trading on margin allows a trader to borrow funds from their broker so they can buy more shares than the cash that is currently within their account. Intraday trading margins also allow traders to short-sell their positions. By utilising the power of leverage, one gets to amplify their returns.

However, one can also potentially amplify losses. Day trading has inherent risks since it highly depends on fluctuations in stock prices on any given day. Intraday margin trading can result not only in substantial profits but also huge losses in a short period of time. One’s margin is calculated by considering the client’s total exposure in the current market. One’s margin is the total of their VAR or ‘value at risk’ and their ELM or ‘extreme loss margin.’

In short, in day trading, no margin allows an intraday trader to increase their buying power. They can buy greater amounts than they currently possess the cash for, with their brokerage firm filling their shortfall at interest. As the dictum does, with higher risk comes high returns. A fair warning is that there are no guarantees to these returns. Margin trading for day traders has certain requirements. These are as follows.

Who Is Eligible for Intraday Margin?

• Any investor interested in intraday trading can open both a demat and a trading account, provided they submit the necessary documentation during the account setup process.
• Intraday margin trading is typically available for those engaging in equity trading without additional requirements. However, trading in futures and options may necessitate proof of income.
• It is advisable for intraday traders to assess various brokers, prioritising those that are fully registered and offer competitive rates, swift transaction processing, and superior trading platforms to enhance their trading efficiency.

SEBI’s Updated Regulations for Intraday Margin

• In an effort to manage market risks, the Securities and Exchange Board of India (SEBI) has revised margin regulations. Effective from September 2021, brokers can now offer a maximum leverage of up to 5x, a reduction from previous caps which could reach 40-50 times.
• Traders are now required to maintain an initial margin of 50% of the investment value. Furthermore, the maintenance margin must be kept at 40% of the market value.
• Under the latest SEBI directives, traders must ensure all margin prerequisites are met prior to the commencement of the trading session, aligning with the intent to strengthen market oversight and trader safety.

Margin Requirements by SEBI

According to guidelines detailed by SEBI, those who wish to trade on margin need to maintain 50% of their total investment amount as their initial margin and 40% of the market value as their maintenance margin, respectively. SEBI has also mandated that these amounts need to be paid in cash. Until this year, traders were required to meet their margin requirements in their account by the time the trading day ended. New margin rules from the Securities and Exchange Board of India, however, require that one fulfill their obligations for margin trading at the beginning of each new intraday deal.

The stock exchange will calculate a trader’s margin requirements based on how volatile the market is, which constantly fluctuates throughout a single trading day. From the 1st of December, a clearing corporation that is an official entity under the stock exchange will send at least four client-wise separate intimations each day so traders can meet their intraday trading margin requirements.

Since September of 2020, the margin requirement for trading on the cash market has also been changed by SEBI. Intraday traders, for example, have to deposit about 20% of the funds from their total transaction volume with their broker to avail of the margin facility. As collateral, one is required to pledge any existing securities. Simply ask your broker for the latest list of instruments you have invested in which you can use as collateral.

What are Day trading Margin Calls?

Day trading margin calls and a maintenance amount for margin trading are required for intraday margin trading in India. As an intraday margin trader, you must maintain a certain amount in your account when you are margin trading. A margin call will be issued if you fail to maintain this amount within the same trading day. The call will demand that you close out your positions or add money into your account to bring it back up to margin maintenance value.

A margin call can hike up one’s costs if one’s trades underperform for whatever reason. Consider the following example when it comes to day trading on margin. Let’s say that a trader has ₹20,000 more than the amount required for margin maintenance. This will give the trader with day trading purchasing power of ₹80,000 if she traders on a 4x margin (4 x ₹20,000). Suppose this trader purchases around ₹80,000 of ABC Corp’s stock at 9:45 am.

At 10 am, the trader then goes ahead and purchases ₹60,000 of XYZ Corp on the same day. She has now exceeded her purchasing power limit. Even if she were to sell both of these positions during her afternoon trade, she would be receiving a day trading margin call on the next trading day. Note that the trader could have prevented herself from receiving the margin call if she chose to sell the ABC Corp stock before purchasing the XYZ Corp stock.

Advantages of Intraday Margin

• Margins allow you to capitalise on trading opportunities even with limited funds, enabling efficient use of available capital.
• You can leverage the shares held in your demat account as collateral, obtaining the approval of your broker to secure the needed margin.
• Margin facilities can significantly enhance your Return on Investment (ROI) by increasing your purchasing power, allowing you to acquire more shares without additional capital.
• This increased leverage can lead to potentially higher returns within the same trading day, optimising the use of your investment.

Disadvantages of Intraday Margin

• High market volatility can expose margin traders to greater financial risks, potentially leading to substantial losses.
• A minimum balance is required in margin accounts; failure to maintain this can force the broker to close positions, causing missed opportunities.
• Novice traders often encounter severe losses due to over-leveraging, especially when they misjudge market conditions or fail to manage risks properly.
• Engaging in margin trading requires careful risk management to avoid exhausting capital through large, unfavourable trades.

Conclusion

Intraday margin trading offers the dual potential of significant profits and risks. While it allows traders to maximise their investment and enhance their purchasing power through leverage, it also exposes them to market volatility and potential financial strain. SEBI’s updated regulations aim to mitigate these risks by setting stricter margin requirements, ensuring that traders maintain adequate funds to support their positions. It is crucial for traders to understand these dynamics and choose brokers that align with their trading goals and risk tolerance to optimise their outcomes in the fast-paced trading environment.

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