What is Day Trading on Margin?

What is day trading on margin?

Day trading is also known as intraday trade. It involves selling securities one has purchased within the same day to lock in profits from the stock price movement. Day trading on margin allows traders to borrow money from brokers so that they can purchase more shares than their current cash balance. Margin trading intraday allows traders to short-sell their positions. You can increase your returns by using leverage.

One can, however, increase losses. Day trading is subject to the volatility in stock prices on any given day. This can lead to inherent risks. Margin trading intraday can lead to large profits, but also big losses over a short time. The total market exposure of the client is used to calculate one's margin. The total of the client's VAR (or 'value at risc') and their ELM (or 'extreme loss' is their margin.

Day trading without margin is a way for intraday traders to increase their purchasing power. Their brokerage firm will pay interest on the difference and allow them to buy more than they have cash for. High returns come with higher risk, as the old saying goes. These returns are not guaranteed. There are certain requirements for day traders who trade margin. These requirements are listed below.

Margin Requirements - SEBI

SEBI guidelines state that those who want to trade on margin must maintain a minimum of 50% of their total investment and a minimum of 40% of the market value for their maintenance margin. These amounts must be paid in cash, as SEBI also requires. Up until this year traders had to meet their margin requirements by the end of each trading day. The Securities and Exchange Board of India has changed the margin rules to require traders to meet their margin trading obligations at the start of every intraday deal.

A trader's margin requirements will be calculated by the stock exchange based on how volatile a market is. This fluctuates continuously during a single trading day. A clearing corporation, which is an official entity of the stock exchange, will start sending at least four separate client-wise intimations every day to traders so they can meet their intraday margin requirements.

SEBI has changed the margin requirements for trading on the cash markets since September 2020. For the margin facility to be available, intraday traders must deposit 20% of their total transaction volume to their broker. You must pledge any securities that you have already invested in as collateral. Ask your broker for the most recent list of instruments that you have invested in, which could be used by you as collateral.

What is Day trading Margin calls?

For intraday margin trading in India, day trading margin calls and a maintenance amount are required. When margin trading, intraday margin traders must maintain a certain amount. Margin calls will be issued if you fail to keep this amount in your account within the same trading day. You will be asked to close your positions or to add funds to your account in order to restore your margin maintenance value.

If trades are not performing well, a margin call can increase one's cost. Take the following example for day trading on margin: Let's suppose that a trader has Rs20,000 extra than what is required to maintain margin. If she trades on a 4-x margin (4x Rs20,000), this will give her a day trading purchasing power equivalent to Rs80,000. Let's say that the trader purchases approximately Rs80,000 worth of stock from ABC Corp at 9:45 AM.

The trader purchases Rs60,000 of XYZ Corp at 10 AM. Her purchasing power limit has been exceeded. She will still receive a margin call for day trading on the next trading day, even if she sold both these positions in her afternoon trade. The trader could have opted to sell the ABC Corp stock prior to purchasing the XYZ Corp. This would have prevented her from being eligible for the margin call.