SEBI Rule on Margin Trading; Indepth information about Margin Trading

In general, new rules can frequently result in a lot of good things. But were the new margin requirements for intraday trading from SEBI the same? Why not, then? Due to the significant modifications brought about by the new margin restrictions, how will this influence intraday trading?

 

Understanding the concept of margin in intraday trading is more crucial for us than SEBI’s new margin rule.

 

Let’s begin, then!

What does intraday trading margin mean?

Nearly all of you are familiar with intraday trading. But do you understand what margin is in intraday trading and why it’s significant in the market?

 

If not, describe what margin trading is for us.

 

Have you ever thought of borrowing money from a bank to purchase a unit? In the stock market, margin serves the same purpose as debt.

 

A trader can borrow this much cash from a stockbroker in order to profit from intraday trading.

 

So tell us now how margin functions.

Let’s say you wish to purchase firm stock and you have one million yen. The stock currently has a Rs.2000 per share market price. You purchased 50 of the same stock. The stock price increased by 15% during the same trading session to Rs.2300. You made the choice to sell each of your 50 shares.

Your gain in this scenario would be Rs.15,000.

SEBI Rule On Margin Trading

What would you do if you were given a margin of up to 10 times the original amount?

There is an opportunity for you to make a sizable profit.

 

How?

To do that, let’s revisit the example from above. Thus, instead of trading for Rs.1,000, you can do so for Rs.10,000.

 

Your profit will increase by ten times in this manner.

 

Therefore, if you’re also interested in learning how to make money from intraday trading, read on to learn how to increase your profits by using margin.

 

Therefore, it may be more profitable to combine intraday stock trading with margin trading if you choose the proper stock.

 

After discussing margin in intraday trading, let’s review SEBI’s new margin regulations for intraday trading.

What are the new SEBI margin regulations?

 

According to the SEBI’s new margin regulations, starting on December 1, 2020, the margin will be reduced by 25% every three quarters.

 

How does this apply? Accordingly, if the margin was 100% before December 2020, it will now be reduced to 75%.

 

Let’s use a timetable to fully grasp this:-

  • 25% less as of December 1, 2020.
  • March 1, 2020 minus 25 and 25 equals 50% less.
  • June 1, 2021 minus 25 plus 25 plus 25 is 75% less.
  • No margin on September 1, 2021.

Therefore, starting in September 2021, the highest margin a stockbroker can provide traders is 5 times the market value. Prior to the new margin norms established by SEBI, it was 40–50 times larger.

 

If we look at the margin requirements, the traders will keep an initial margin of 50% of the investment value. Additionally, the range must be 40% of the current market value for maintenance margin.

 

The stockbroker continued to verify these requirements until the end of the market session. However, a trader would now be required to meet all margin requirements before the start of the market session due to SEBI’s new margin rules for intraday trading.

 

Because of this, traders now find it more challenging to take use of margin trading’s advantages. Let’s examine the effects of SEBI’s new margin regulations today and learn how to trade intraday without margin.

Impact of SEBI’s new margin regulations on day-to-day trading

 

In order to serve the demands of traders and investors, some new rules are being established on the stock market. To stop the abuse of margin trading facilities, SEBI imposed new margin rules.

 

Because of margin trading, many intraday traders were utilising margin funds to trade in incredibly hazardous and volatile securities, which increased their losses. Despite the fact that this action was meant to assist all stock market traders, many intraday traders were disappointed.

then why?

 

The new regulations severely impacted intraday traders by limiting the amount they could use to execute profitable trades. Let’s use comparison to better comprehend this.

 

Consider buying shares at the current market price of 50 and selling them for 55 each with a transaction quantity of 10,000. Let’s now examine two potential scenarios.

 

Case 1: A 10-times margin:-

Your trading amount will be Rs.1,000,000 since the margin is now 10 times that amount. You can now purchase 2000 shares for 50 shares. And in this scenario, if you sell them for 55 cents per share, you will make a profit of 10,000.

 

Case 2: A Margin is five times:-

Your trading amount in the second scenario, when the margin is multiplied by 5, would be Rs.50,000. Therefore, you will only be able to purchase 1000 shares instead of 2000. Your profit will now be Rs.5,000

 

Therefore, it follows that the profit will be lesser the lower the margin. This is what has kept many traders from giving up intraday trading around the nation. As a result, many traders are now obliged to engage in derivatives, which is a more risky industry.

 

Additionally, the upfront margin in the futures market has increased, which is problematic for the traders there.

 

An additional drawback for intraday traders is the demand for upfront margin. Traders will be penalised if there is an abrupt spike in price volatility and they do not provide the necessary margin.

This has significantly impacted intraday trading.

 

Conclusion:-

Many traders are not pleased with SEBI’s decision to cut the margin amount under its new intraday trading margin guidelines. Previously, a stockbroker could grant margin as he saw suitable, but today the maximum profit is only five times.

 

It has advantages and disadvantages. As a result, there are fewer risky and undesirable margin traders, which decreases the likelihood that an intraday trader will earn.

 

But in addition to intraday trading, there are a lot of additional possibilities available.

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