What is Intraday Margin?

How Does Intraday Margin Trading Work? 

The availability of margin allows you to leverage larger positions than your cash balance would otherwise allow. You only need to pay a portion of the order value, which is offered as collateral to the broker. Your broker will fund the rest and charge interest on the funds offered. Since it is day trading, your positions must be squared off at the end of the day. 

With an intraday margin, you can buy and sell a large number of shares to benefit from price swings. However, leverage does not only amplify your potential gains but also your potential losses. The interest costs and margin requirements add to your total losses if your trade fails. Day trading is inherently risky, and margin compounds the total risks, potentially causing substantial losses in a short time. 

Let’s take an example to understand how this works. 

Say you have ₹10,000 in cash to buy a certain share. It is currently trading at ₹200/share, which lets you buy 50 shares. Your broker gives you a 3x margin, with which you buy 150 shares worth ₹30,000 (with your own and broker's funds).

If the share price appreciates by 7% on the same day, you will make ₹2,100, higher than the ₹700 you would have earned with just your cash balance. You would, of course, have to pay interest on the borrowed funds. However, if the share price depreciates by 7%, you would lose the same amount, while also having to pay interest on the borrowed funds. 

Also Read : Intraday Trading Guide for Beginners

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What are Margin Calls?

In intraday trading, brokers require you to maintain a certain balance in your margin trading account called the maintenance margin. If your margin balance falls below this amount due to market movements, the broker will issue a margin call to cover the risks of lending money. 

A margin call is essentially a demand to fulfil the margin requirements by closing your positions or adding money or additional securities to your margin account. Failing this, the broker can liquidate any open positions to bring the account to a minimum value without needing your approval. 

Pros and Cons of Intraday Margin Trading

Here are some advantages and disadvantages of using margin for intraday trading:

Pros of Margin Trading

• You can use both cash and shares held in your demat account as collateral. 
• The margin trading facility allows you to significantly leverage your positions, leading to potentially higher returns than possible with your own funds.
• Brokers also allow you to participate in intraday short selling using margin. 
• This facility lets you capitalise on trading opportunities at any given time, regardless of your current cash situation. 

Cons of Margin Trading

• The intraday margin trading facility combines the risks of day trading and margin trading, exposing you to great risks with a single trade. 
• Besides the interest cost, you have to pay brokerage fees and maintain a minimum balance in your margin account.
• Overleveraging can lead to massive losses. Many beginner investors tend to get into overleveraged positions and fail to employ proper risk management. 
• If the account falls below the requirement margin levels, you may get a margin call. Brokers can liquidate your positions at a loss if you are unable to close them by the day's end. 

SEBI’s Requirements for Margin Trading

The margin requirement is the minimum balance you must maintain in your margin account to use the margin trading facility. The Securities and Exchange Board of India (SEBI) has set in place the following rules for intraday margin trading in the country:

• According to SEBI’s new margin rules for intraday trading, day traders must deposit at least 20% of the transaction amount with their broker. 
• The margin amount offered by a broker will decrease by 25% every three quarters. 
• Traders must maintain an initial margin of 50% of transaction value and a maintenance margin of 40% at all times.
• For intraday trading, traders must fulfil these margin requirements before placing an intraday order.
• Brokers can provide a maximum leverage of 5x of investment value. 

Also Read : Benefits of Intraday Trading

The Bottomline 

The margin facility allows intraday traders to significantly increase their positions and use leverage to capitalise on new trading opportunities. While intraday margin trading carries some benefits, it is a very risky trading strategy. Traders must put in place proper risk management tools, such as stop losses and timely exits to avoid massive losses. 

Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.