What is day trading on margin?

Day trading, otherwise known as intraday trading, is the practice of selling securities that one has bought within the same day itself with the goal of locking in instant profits from stock price movement. Day trading on margin allows a trader to borrow funds from their broker so they can buy more shares than the cash that is currently within their account. Intraday trading margins also allow traders to short sell their positions. By utilizing the power of leverage one gets to amplify their returns.

However, one can also potentially amplify losses. Day trading has its inherent risks since it is highly dependent on the fluctuations in the prices of the stock on any given day. Intraday margin trading can result not only in substantial profits but also huge losses in a short period of time. One’s margin is calculated by considering the total exposure the client has in the current market. One’s margin is the total of their VAR or ‘value at risk’ and their ELM or ‘extreme loss margin.’

In short, day trading no margin allows an intraday trader to increase their buying power. They are allowed to buy greater amounts than they currently possess the cash for, with their brokerage firm filling their shortfall at interest. As the dictum does, with higher risk comes high returns. A fair warning is that there are no guarantees to these returns. Margin trading for day traders has certain requirements. These are as follows.

Margin Requirements by SEBI

According to guidelines detailed by SEBI, those who wish to trade on margin need to maintain 50% of their total investment amount as their initial margin and 40% of the market value as their maintenance margin respectively. SEBI has also mandated that these amounts need to be paid in cash. Until this year, traders were required to meet their margin requirements in their account by the time the trading day ended. New margin rules from the Securities and Exchange Board of India, however, require that one fulfill their obligations for margin trading at the beginning of each new intraday deal.

The stock exchange will calculate a trader’s margin requirements based on how volatile the market is, which constantly fluctuates throughout a single trading day. From the 1st of December, a clearing corporation that is an official entity under the stock exchange will send at least four client-wise separate intimations each day so traders can meet their intraday trading margin requirements.

Since September of 2020, the margin requirement for trading on the cash market has also been changed by SEBI. Intraday traders, for example, have to deposit about 20% of the funds from their total transaction volume with their broker so that they can avail of the margin facility. As collateral, one is required to pledge any existing securities. Simply ask your broker for the latest list of instruments you have invested in which can be used as collateral by you.

What are Day trading Margin Calls?

Day trading margin calls, as well as a maintenance amount for margin trading, are required for intraday margin trading in India. As an intraday margin trader, you are required to maintain a certain amount in your account when you are margin trading. If you fail to maintain this amount within the same trading day, a margin call will be issued. The call will demand you to either close out your positions, or add money into your account to bring it back upto to margin maintenance value.

A margin call can hike up one’s costs in the case where one’s trades underperform for whatever reason. Consider the following example when it comes to day trading on margin. Let’s say that a trader has ₹20,000 more than the amount required for margin maintenance. This will give the trader with day trading purchasing power of ₹80,000 if she traders on a 4x margin (4 x ₹20,000). Suppose that this trader indulges in purchasing around ₹80,000 of ABC Corp’s stock at 9:45 am.

At 10 am, the trader then goes ahead and purchases ₹60,000 of XYZ Corp on the same day. She has now exceeded her purchasing power limit. Even if she were to sell both of these positions during her afternoon trade, she will be receiving a day trading margin call on the next trading day. Note that the trader could have prevented herself from receiving the margin call if she chose to sell the ABC Corp stock before purchasing the XYZ Corp stock.