Day trading is the practice of selling securities that one has purchased on a single day. The aim is to take advantage of profits and stock price movements. It is also known as intraday trading. Day trading in margin enables traders to borrow funds from their broker so that they can buy more shares than the cash currently on deposit. Intraday trading margins also provide traders with the opportunity to reduce their positions. Leverage helps you to increase your gains.
To understand more about intraday margin trading calculations and also its benefits, follow the article below.
What is the Intraday Margin?
In day trading, investors buy and sell shares at the same time. The broker will give you a margin for purchasing more shares than you can use from your funds during this type of trade. It’s like borrowing money from a broker to trade. Most brokers in India provide this facility.
As an intraday trader, the margin borrowed to buy and sell more shares enables you to profit from change in prices. At the same time, however, losses are magnified when you lose money for a larger number of shares because your trades don’t go according to plan. You must only use leverage in specific transactions with a higher chance of success if you want to maximise your use of this facility.
Calculation of Intraday Margin
Let’s take a look at an example to understand how margin affects the outcome of your trade.
Suppose you have bought 200 shares for Rs.100 each. You need a capital of up to Rs.20,000 in an ordinary trade if you want to buy shares. But, assuming a margin of 5x, you will need only Rs.4,000 for an intraday trade. By using a 5x margin, you can purchase shares worth five times your capital, or five times your leverage.
Role of SEBI in Intraday Margin Trading
The Securities and Exchange Board of India is the regulatory body for all matters relating to the stock market. In line with SEBI guidelines, margin traders should maintain at least 50 % of their overall investments in the form of an initial margin and 40 % of current values as a maintenance margin. In addition, as a margin requirement, SEBI will require that cash balances be maintained in the trading account between 2020 and 2025.
Previously it was just decided how much margin money was needed at the end of the day. However, since the new rules have been introduced, traders are still required to comply with their margin requirements at the beginning of any new transaction. Based on the volatility of the stock market, the maintenance margin will be fixed by the stock exchanges. In the interests of retail traders who could lose money if markets become volatile, these measures will be adopted by SEBI.
How Does the Concept of Intraday Margin Trading Work?
When you’re trading on an online platform, your brokerage firm allows you to make use of its resources to buy a larger number of stocks. So that you can afford it at any given time. You are lent money by a brokerage firm, which retains the shares as collateral. In day trading, this is called a margin.
In addition, the broker demands that you comply with margin calls and maintenance margin rules. The losses can be amplified by borrowed funds, margin calls and maintenance rules if the transactions are lost. However, the margin in day trading may be very valuable if you use it carefully and efficiently.
Advantages of Intraday Margin
Some of the advantages of intraday use of margin are shown below.
- You can use a margin facility to take advantage of the opportunity if you do not have enough capital and find trading opportunities.
- If your broker allows it, you may avail yourself of a facility to use the Demat shareholding as collateral for margin.
- When you use the margin facility, your return on investment will increase.
- By allowing you to buy more shares with the same amount of capital, it increases your purchasing power.
Conclusion
Intraday trading on margin, when done incorrectly, is a risky undertaking. However, an intraday trader can make the most of this facility if it is done properly. New traders who are looking for success in intraday trading must follow a strictly structured trading regime and maintain stringent stop losses on all transactions. In addition, you need to choose the right broker with an effective trading platform to understand what is margin trading facility. Kotak Securities offers a reliable trading interface and a smooth intraday trading experience. You can surely go ahead with this for safe and secure trading.
