One of the most popular trading strategies employed by traders is day trading, also known as intraday trading. By capitalising on short-term price fluctuations, traders aim to make a profit from price movements without holding positions overnight. Another reason for their popularity stems from the fact that the capital needed to trade the same quantum of shares intraday is significantly less than that required for placing delivery trade orders. This is due to the principle known as margin.
Let us understand what is margin in intraday trading, its rules, and the pros and cons of margin trading.
What is intraday margin?
In intraday trading, you can buy and sell shares on the same trading day. Moreover, you only need a portion of the total cost of the stocks as collateral, as the broker offers a specific margin to buy more shares than you can by using your capital. You can think of it as funds you borrow for trading, and you must square off positions by the end of the trading day.
This intraday margin lets you buy and sell more shares and capitalise on the rising prices. While leverage can significantly amplify your gains, you also risk incurring heavy losses. By factoring in your total exposure in the current market, the intraday trading margin is calculated, and this consists of value at risk (VAR) and extreme loss margin (ELM).
The Securities and Exchange Board of India (SEBI), which is the regulating authority for everything pertaining to the stock market, has introduced margin rules and requirements. This is done to protect the investors’ interests, reduce brokers’ risks, standardise leverage norms, and bring about transparency in the stock market.
Margin requirements by SEBI
SEBI recently changed its intraday margin rules relating to meeting margin requirements. Before, the margin requirement was computed at the end of the trading day. Now, however, traders must fulfil their margin requirements at the beginning of every new intraday transaction.
SEBI also revised the margin requirement for cash market trading in 2020. For instance, intraday traders need to deposit around 20% of the amount from their total transaction volume with their broker to access the margin facility. Traders can pledge any of their existing securities as collateral.
What are day trading margin calls?
In simple terms, intraday margin calls are alerts from brokers to traders to add money to their margin accounts to meet the margin maintenance requirement. Failing to do so will result in forced position closure due to insufficient funds.
Let us look at an example to understand this concept. Assume ‘X’ is a trader with Rs. 30,000 more than the funds required for margin maintenance. This gives them an intraday purchasing power of Rs. 1,20,000 (trading with a 4x margin). Let us assume ‘X’ purchased Rs. 90,000 of XYZ Corp’s stock at 10:45 a.m.
However, at 11 a.m. on the same day, ‘X’ purchases Rs. 60,000 of ABC Corp’s stock. The trader has exceeded their purchasing power limit, and even if they were to sell their positions in the afternoon trade, they would receive a day trading margin call during the next trading day. ‘X’ could have avoided getting the margin call if they had sold XYZ Corp’s stock before buying the stock of ABC Corp.
Advantages of intraday margin
Some of the advantages of intraday trading using margin are provided below.
- If you don’t have enough capital and find a good trading opportunity, you can utilise the margin facility to make the most of this opportunity.
- With your stockbroker's agreement, you can use the shares in your demat account as collateral to secure the margin.
- By using the margin facility, you can enhance and boost your ROI.
- The intraday margin increases your capital’s purchasing power, as it allows you to buy additional shares using the same capital.
However, intraday margin comes with its own set of disadvantages.
Disadvantages of intraday margin
- Owing to market volatility, the intraday margin facility exposes you to greater risks. You can incur a significant loss in a single trade.
- You must fulfil the minimum balance requirement. Failing to do so will result in the broker exiting your trade, and you will have to forego a good trade opportunity.
- Over-leveraging is a common cause of significant losses in the stock market. Novice traders tend to exhaust their capital by engaging in day trading with large margins.
You must remember that by following good practices, you can benefit from margin trading and make decent profits.
Conclusion
Margin in intraday trading can be risky if you do not follow the right practices. However, by being careful and with the right approach, you can take advantage of this facility. Additionally, selecting a suitable broker with an efficient trading platform is essential.
