What is Day Trading Margin?
Day trading, also known as intraday trading, is the process of buying and selling securities in the stock market on the same day through a margin account. The objective of day trading online is to lock in profits from the movement of stock prices.
However, investors require a hefty investment sum for volume-based intraday trading. This is made possible through the intraday trading margin concept. In the stock market, intraday trading margin refers to the process of buying more stocks than an investor can afford to.
This margin in day trading comes from the funds borrowed from the broker to trade in large sizes. Intraday trading can result in substantial gains or losses in a short period because of the high dependence on fluctuations in stock prices on a particular day.
Also Read: Introduction to Intraday Trading
If you are interested in day trading online, understand the concept of margin in day trading and how it works:
What is an Intraday Trading Margin?
Intraday trading margin is a feature in day trading that facilitates trading for investors who do not have the requisite cash. Buying securities through the margin account enhances your trading power by giving you funds to buy a greater amount of shares than you have cash for. Margin in day trading also permits short-selling.
The shortfall in day trading funds is fulfilled by the brokerage firm, which charges interest for this facility.
How does the Concept of Margin in Day Trading Works?
When you engage in online intraday trading, your brokerage firm gives you an option to utilise its resources (funds) to buy a larger quantity of a stock (s) than you can afford at any particular time. The brokerage firm lends you the money and keeps the shares as collateral. This is known as margin in day trading.
The idea behind intraday trading margin is to amplify your purchasing power to hold more cash positions than you can otherwise afford. By using the margin facility in intraday trading, you increase your potential returns and losses.
Moreover, the broker requires you to adhere to margin calls and maintenance margin rules. If the trades go sour, borrowed funds plus margin calls and maintenance rules can further amplify the losses. But if used wisely and diligently, the margin in day trading can prove significantly advantageous for you.
Intraday trading margin can be used for all securities, including equity, bonds, futures, commodity, CFDs (Contract for differences), etc. If you want to use the margin option in online intraday trading, request your broker to open a margin account. You would need to pay an upfront sum to the broker in cash, also known as minimum margin. This amount can be used by the broker to square off a trade if you lose the trading bet and fail to return the sum borrowed.
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Margin Requirements by SEBI
As per SEBI (Securities Exchange Board of India), you have to keep a 100% margin (earlier 75% margin was required) in your bank account to use the intraday trading margin facility. This 100% margin is ascertained as per the market volatility - VaR (value at risk) - defined separately by exchanges for each stock. VaR is higher for penny stocks. These intraday trading margins should be fulfilled at the commencement of each new intraday deal.
For instance, if you want to buy shares of Company X worth ₹1 lakh, and the margin set by the broker is 20%, you need to maintain a balance of ₹20,000 with your stockbroker.
If you fail to maintain the intraday trading margin, a margin call is issued, instructing you to either close your day trading positions or add money to your account to fulfil the margins in day trading.
Overall, online intraday trading margins aim to provide you with the benefit of leverage trading. However, intraday trading margins have strict rules, which demand absolute adherence. If you want to use the margin in day trading, you can ask your broker, and the facility is available in no time.
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- Demat account
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- Intraday trading
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Stop Loss in Stock Market & Its Use
Stop-loss in the stock market helps to limit the loss in a trade. In other words, it is an order to sell the stock or any security when it hits a particular price. When an investor places a stop loss, he or she instructs the broker to sell the stock when it reaches a pre-defined price limit.
What is Fundamental Analysis and How to Do it?
If you have been trading online or wish to start soon, there are a few things that you need to do it. The first and foremost is to open a trading account and a Demat account. The next step is to find suitable stocks that you can invest in.
Online Share Trading in India at Low Brokerage
Since the SEBI has mandated all transactions in the stock market to go through a stockbroker, as an investor, the brokerage is an unavoidable cost. The markets are highly volatile and competitive, rendering profit-making a difficult task. Add to it brokerage and other costs associated with trading, and you have a higher mountain to climb.
Frequently Asked Questions
According to the new SEBI rules, intraday trading investors have to maintain the intraday trading margins in their accounts before the commencement of each new intraday deal. The margin payment is now upfront rather than the previous practice of collecting it at the end of the day.
As per the new rule, intraday trading investors have to maintain 100% of the margin required in their accounts. If you are interested in buying shares of XYZ company worth ₹2 lakhs, you need to maintain a margin of ₹40,000, provided the margin requirement for those shares is 20%. Earlier, you only had to maintain a 75% margin requirement.
No, the margin in day trading differs for each share. The intraday trading margin for a share depends on the VaR (value at risk).