What is Intraday Margin Trading?

Have you ever wondered how traders make huge profits from numerous minor price fluctuations in stock prices over a single trading day? Intraday margin enables a trader to trade in larger volumes with limited capital, helping them earn profits even with a small capital. However, using intraday margin also involves higher risks.

This blog will explain intraday margin, its benefits and drawbacks, and the safety measures that all traders should take.

Meaning of Intraday Margin Trading

Intraday margin is the leverage provided by a broker to their clients, which allows them to buy or sell stocks worth more than the funds available in their trading account. However, the trading positions created using intraday margin have to be closed by the client on the same trading day. Using the intraday margin facility, a trader can potentially increase their gains. 

Features of Intraday Margin Trading

The key features of intraday margin are as follows:

1. Same Day Square Off: The position taken by the client has to be closed on the same day.
2. Auto Square Off: The position of the client can automatically be squared off before the end of the trading session of a particular day.
3. High Profit: Using intraday margins can increase the profitability of the investor, as they can use the leverage to purchase stocks.

How Does Intraday Margin Trading Work?

The process of how intraday margin works is as follows:

1. Select the Intraday Option: Instead of choosing “Delivery” when placing a trade, the trader chooses “Intraday” or “MIS (Margin Intraday Square-off)”. This means that the position will be closed that same day.
2. The broker provides leverage: The broker provides leverage (for example, 5x to 20x) according to the stock’s volatility and liquidity.
3. Executing Trade: The trader buys or sells shares using the available margin. For example, a trader can use ₹10,000 as a margin to buy 1,000 shares of a stock priced at ₹100 if 10x leverage is available.
4. Monitoring the Trade: Throughout the trading day, the trader watches price movements to book profits or limit losses.
5. Squaring Off Position: The trader must manually square off the position before the market closes; otherwise, the broker will execute it automatically.

Example of Intraday Margin Trading

Suppose you have ₹10,000 in your trading account, and you want to buy 100 shares of XYZ, trading at around ₹1,000 per share. Suppose you use the intraday margin with 10x leverage provided by your broker. Let’s calculate it

Total Amount Required to Purchase 100 Shares = ₹1000 * 100 = ₹1,00,000

Your broker will provide you with 10x leverage, hence your trading limit will increase to 1,00,000. Now you can purchase 100 shares on an intraday basis.

Let’s assume you have purchased 100 shares at 10 a.m., and around 2 p.m. stock price rises to ₹1,050, and you sell your shares at ₹1,050. Now your profit will be calculated as follows:

Profit = (Selling Price – Purchase Price) * No. of Shares

= ( ₹1,050 – ₹1,000 ) * 100

= ₹50 * 100

= ₹5,000

Hence, your total profit will be ₹5,000, and it was earned on the capital of ₹10,000. Therefore, your profit was 50% on your invested capital.

Benefits of Using Intraday Margin Trading

The key benefits of using intraday margin are as follows:

1. Potential for Higher Returns: Traders with limited funds can take on large positions. For example, using 10x leverage to execute a ₹1,00,000 trade with ₹10,000 might result in higher profits.
2. Liquidity: Intraday trades usually involve highly liquid stocks or indices, which ensure quick entry and exit without significant price fluctuations.
3. Short-Term Profit: Through intraday margin trading, traders can profit from short-term market trends and volatility without holding positions overnight.
4. No Delivery Charges: Since trades are squared off on the same day, demat settlement is not necessary, avoiding delivery-related fees such as transaction taxes and DP charges that apply to delivery trades.

Read Also: Top Tips for Successful Margin Trading in India

Risk of Using Intraday Margin Trading

There is a significant risk of using intraday margin; a few of such risks are mentioned below:

1. Increased Losses: Leverage increases losses in the same way that it increases profits. Even a slight decline in the stock price can result in significant losses.
2. Volatility of the Market: Because of the extreme volatility of intraday markets, profitable trades can be quickly converted into losing ones by unexpected price changes caused by news, earnings releases, or market sentiment.
3. Margin Call: A margin call, which requires the trader to deposit additional funds immediately, may be given by the broker if the value of a trade falls rapidly. And if you don’t add the margin amount, you might have to square off at a loss.
4. Limited to Particular Stocks: Not every stock is eligible for margin. Brokers generally restrict trades by limiting margin trading to large-cap and highly liquid stocks.

Precautions to Use Intraday Margin Trading

An investor should take the following precautions before using intraday margin:

1. Stop Loss: In case the stock moves against your position, always set a stop-loss to minimise your losses.
2. Tracking: It is necessary to continuously monitor positions and market trends when doing intraday trading.
3. Understanding Policy: In order to prevent unexpected difficulties during the trade, be informed of your broker’s leverage guidelines, auto square-off timings, and eligible stock list.

Read Also: Top Indicators Used By Intraday Traders In Scalping

Conclusion

On a concluding note, for active traders with limited capital who desire to make significant profits from daily market movements, intraday margin trading can be a very effective tool. Increased exposure and the possibility of greater profits are made possible by the leverage it offers. However, a greater risk is associated with a higher reward. Traders need to approach intraday margin with careful planning, appropriate risk management, and a thorough knowledge of the broker’s policies. It is effective for people who can keep a close eye on the markets and act immediately. Intraday margin trading, when used properly, can be a useful tool for a trader; however, it is advisable to consult your investment advisor before making any investment decision.

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