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SEBI New Rules for Intraday Margin

SEBI New Rules for Intraday Margin

New rules can often bring a lot of positive outcomes in general. But was the case the same with the SEBI new margin rules for intraday trading? If not, then why? What are the major changes that are brought in because of the new margin rules and how is it going to impact intraday trading?

Before we dive into the whole discussion, it is important for us to understand the concept of margin in intraday trading.

So, let’s begin!

What Is Margin in Intraday Trading

Have you ever considered taking a loan from the bank to purchase an entity? Margin in the stock market serves the same purpose as a loan.

It is the amount of money that a trader can borrow from the stockbroker and make money in intraday trading. Wondering how does margin work?

Let us consider an example. Suppose you have ₹1,00,000 and want to purchase the stocks of a company. The current market price of the stock is ₹2000. You purchased 50 stocks of the same. In the same market session, the price of the stock increased 15% and reached ₹2300. You decided to sell off all your 50 stocks.

In this case, your profit will be ₹15,000.

Now, what if you were given 10X of the same money? So, instead of trading with 1,00,000, the amount would have been ₹10,00,000. Now keeping the price movement in mind, the profit, in this case, would have been, ₹1,15,000. That is a 10 times jump in your intraday trading profit.

Therefore if you select the right stocks for intraday trading and then combine it with margin trading, it can yield great results.

Now that we have talked about margin in intraday trading, let us move to the SEBI new margin rules for intraday trading.

What Are SEBI New Margin Rules?

If we talk about the SEBI new margin rules, then it stated that from December 1, 2020, the margin will decrease 25% every three quarters.

What does this mean? This means that if before December 2020, the margin was 100 percent it will reduce to 75% and then furthermore.

Let us understand this clearly with the timeline.

  • December 1, 2020- 25% less
  • March 1, 2020- 25+25= 50% less
  • June 1,2021- 25+25+25= 75% less
  • September 1, 2021- No margin

So, SEBI new margin rules from September 2021 stated that the maximum margin that a stockbroker can provide to the traders is 5X. This used to be as high as 40-50 times before the SEBI new margin rules.

If we look at margin requirements, then 50% of the investment value has to be maintained by the trader as the initial margin. Apart from this, for the maintenance margin, the range has to be 40% of the current market value.

These requirements were checked by the stockbrokers by the end of the market session. But after the introduction of the SEBI new margin rules for intraday trading, a trader has to fulfill all the margin requirements before the beginning of the market session.

This has made it difficult for the traders to enjoy the benefit of margin trading as much as they used to do before. Let us now have a look at the impact that the SEBI’s new margin rules and know how to do intraday trading without margin.

SEBI New Margin Rules Effect on Intraday Trading

Every time a new rule is imposed, it is done keeping in mind the demands and the requirements of the audience. SEBI introduced the new margin rules to prevent the misuse of the margin trading facilities.

Since there are many share market risks, availing the margin funding is one of the reasons for multiplying the risk.

Because of the margin trading, a lot of intraday traders were using the margin money to trade in extremely risky and volatile equities further enhancing their losses. Although, this step was taken for the benefit of all the individuals involved in the stock market, yet it disappointed a lot of intraday traders.

But why?

The intraday traders were impacted majorly because the new rules restricted the amount that they can use to trade effectively. Let us understand this with the comparative analysis.

Suppose you have a trading amount of ₹10,000 and want to buy shares at the current market price of ₹50 and then further sell them for ₹55 each. Now let us look at the two possible cases.

Case 1- Margin is 10X

Now when the margin is 10X, your trading amount will be ₹1,00,000. For the shares priced at ₹50, you can now purchase 2000 shares. And if you sell them for ₹55 each, your profit, in this case, will be ₹10,000.

Case 2- Margin is 5X

In this second case, where the margin is 5X, your trading amount will be ₹50,000. So now instead of 2000 shares, you will be able to purchase, just 1000 shares. If you sell the same for ₹55 each, your profit now will be ₹5000.

So, as it is clear that the lesser the margin the lesser the profit. This is what has put a lot of traders across the country to leave intraday trading. Subsequently, this has also forced a lot of traders to trade in derivatives, which is a more risky zone.

The upfront margin in the derivatives segment has also increased, leaving the traders in agony there as well.

The requirement of upfront margin in intraday trading is also working as a negative for the intraday traders. If there is a sudden increase in the volatility of the prices, and the traders fail to produce the required margin, they will have to pay a penalty.

This has impacted intraday trading to a large extent.

Conclusion

SEBI new margin rules for intraday trading have decreased the margin amount and a lot of traders are not happy with this decision. Earlier a stockbroker had the choice to give the margin according to their own will but now the maximum leverage is 5X only.

This has both pros and cons. As it has prevented a lot of risky and unwanted margin trades but has also reduced the chances of an intraday trader to earn great profits.

If you are also looking to start your trading journey, open trading account today.

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