Intraday Margin – Meaning, Advantages & Effects of Margin | TradeSmart (2024)

You must have realized that the amount of capital required to trade the same number of shares intraday is lesser than the capital required for placing delivery trade orders. If not, let us tell you an interesting fact. Suppose you need Rs. 1,000 to buy certain shares for delivery, then to trade the same number of shares in intraday, you will need, say, only Rs. 250. Well, this is because of the concept called margin. Margin allows you to buy shares over and above the capacity of your capital. Sounds interesting, right? However, it comes with its cons.

Let us go ahead and know about intraday margin, the impacts of margin trading, certain rules and regulations about margin, and the pros and cons of margin trading.

What is Intraday Margin?

Day trading, aka intraday trading, is a type of investing where you buy and sell the shares on the same day. In this type of trading, the broker provides you with a certain margin to purchase more shares than you can buy using your capital. It is like funds borrowed from the broker to trade. The facility is provided by most brokers in India.

The margin borrowed to buy and sell more shares allows you, as an intraday trader, to take advantage of the rising prices. But at the same time, if the trade does not go in your favour, the losses are magnified since you lose money for the larger quantity of shares. To make the most out of this facility, you must take leverage only in certain trades that have a higher probability of success.

In simple terms, margin increases the power of your capital to buy a larger number of shares. It sure has an impact on the profitability of your trades. Here’s how it works.

Effects of Margin

To understand the impact of margin on the outcome of your trades, let us take an example.

Suppose you bought 200 shares at Rs. 100 each. Ideally, in normal trade, you would need a capital of Rs. 20,000 to buy the shares. But for the intraday trade, you would require only Rs. 4,000, assuming a margin of 5x. The 5x margin gives you 5 times leverage, meaning, you can buy the shares worth 5 times your capital.

Now let us say that you set a target of Rs. 104 and a stop loss of Rs. 98 for the trade. So, if the trade goes right, you earn Rs. 4, which is 4% of the share price. And if the trade fails, you lose Rs. 2 which is 2% of the share value. But since you have paid only 1/5th of the value by using a 5x margin, your ROI will change.

Your chance of profit, in absolute value, is Rs. 800 (Rs. 4 x 200 shares) on the risk of Rs. 400 (Rs. 2 x 200 shares). Since the capital used was Rs. 4,000, there can be a profit of 20% (Rs. 800 ÷ Rs. 4,000) or a loss of 10% (Rs. 400 ÷ Rs. 4,000).

Therefore, because of the margin, if the price moves up by 4%, you make 20% on your capital. And if it goes down by 2%, you lose 10% of the capital. This is how margin magnifies gains and losses. So, we can conclude that the intraday margin has a direct impact on the ROI. And as it works both ways, with the chances of earning increased profits, the risk also magnifies.

Role of SEBI

Securities and Exchange Board of India (SEBI) is the regulating authority for everything related to the stock market. According to SEBI’s guidelines, those who trade with margin should maintain a minimum of 50% of total investment as the initial margin and additionally 40% of the current value as their maintenance margin.

From 2020, SEBI also made it mandatory to maintain the cash balance in the trading account as a margin requirement. Earlier, the margin requirement was only calculated at the end of the day. However, since new regulations were implemented, it is still required that traders meet their margin requirements at the start of each new transaction.

The maintenance margin will be fixed by the stock exchanges based on the volatility in the stock market. These measures are taken by SEBI in the interest of retail traders who could lose money if markets become very volatile.

Advantages of Intraday Margin

Here are some of the benefits of intraday trading by using margin.

• If you have insufficient capital and find a trading opportunity, then you can benefit from a margin facility to capitalize on the opportunity.
• You can avail a facility to utilize your shareholding in the DEMAT account as collateral for the margin if your broker allows the same.
• As we discussed in the example, your ROI will improve when you use the margin facility.
• It increases the purchasing power of your capital by allowing you to purchase more shares with the same capital.

Let us also look at the other side of the coin.

Disadvantages of Intraday Margin

• Along with higher profits, it also magnifies the losses. In a single trade, you could lose a big chunk of your capital if the trade goes wrong.
• The minimum balance requirement has to be fulfilled at all times. If you fail to do so, your broker might exit your trade. You could lose an opportunity for a good trade.
• Over leveraging has been a very popular reason for major losses in the stock market. Many novice traders lose their entire capital while trading with a large margin.

That said, you must follow good practices to make the most of margin trading. You can use the facility wisely only when you’re confident. You can utilize lesser margin capacity instead of using full leverage.

In a nutshell

Intraday trading using margin is a risky business if done haphazardly. However, if done in the right way, an intraday trader can make the most out of this facility. Following a trade setup in a disciplined manner and maintaining a strict stop loss in all trades has proven beneficial to many novice traders who succeed in this business. But along with that, you must also choose the right broker with an effective trading terminal.

TradeSmart provides a robust trading terminal and facilitates a seamless intraday trading experience at the lowest brokerage in the country. You can select the plan as per your requirements. TradeSmart also provides up to 5x margin on intraday equity trading. You can check the margin here.