A Guide to Day Trading on Margin

Margin allows traders to increase their purchasing power to secure larger positions than their cash positions would allow. By borrowing money from their broker to trade larger amounts, traders can increase both returns and potential losses. Intraday trading involves buying and selling the same stocks multiple times during business hours in the hope of making quick profits from fluctuating stock prices foreign exchange market today. Intraday trading is risky because it depends on fluctuations in stock prices on a given day and can lead to large losses in a very short period of time.



Margin and Day Trading

On the other hand, margin buying is a tool that makes trading easier even for those who do not have the required amount of money. Buying on margin increases a merchant's purchasing power by allowing him to buy for more than he has in cash; the deficit is compensated by a brokerage firm in exchange for interest. When these two instruments are combined in the form of daily margined transactions, the risks are heightened. And depending on the motto "the greater the risk, the greater the potential return", returns can vary. But beware: there is no guarantee. The rules of the Financial Sector Regulatory Authority (FINRA) define a daily transaction as "buy and sell or sell and buy the same security on the same day in a margin account." Short selling and buying to cover the same value on the same day, as well as options, are also part of a daily trade. When it comes to day trading, some may enter only occasionally and have different margin requirements that we might call "pattern day traders". Let's understand these terms, as well as the FINRA rules and margin requirements.

Margin Requirements

To tradeon margin, investors must have enough cash or suitable securities on deposit with a brokerage firm to meet the initial margin requirement. Under Fed Regulation T, investors can borrow up to 50% of the total purchase cost with margin, with the operator depositing the remaining 50% as an initial margin requirement. The maintenance margin requirements for a daily operator with a model are much higher than for a daily operator without a model. The minimum capital requirement for a model day trader is $ 25,000 (or 25% of the total market value of the securities, whichever is greater), while for a non-model day trader it is $ 2. $ 2,000 forex trading platforms in India. Day trading accounts must meet this requirement independently and not through mutual guarantees between different accounts. In situations where the account falls below this fixed amount of $ 25,000, no further transactions are allowed until the account is replenished.



Margin Calls

A margin call will be made if your account falls below the maintenance margin amount. A margin call is a request from your broker to add funds to your account or close positions to bring your account back to the required level. If you do not comply with the margin call, your brokerage firm may close any open position to reduce the account to the minimum value. Your brokerage firm can do this without your consent and you can choose which position (s) to liquidate. Also, your brokerage firm may charge you a commission for transactions. You are responsible for any losses incurred during this process, and your brokerage firm can liquidate enough stocks or contracts to exceed the initial margin requirement.

Margin Buying Power

The purchasing power of a pattern day trader is four times the excess of the maintenance margin at the close of the previous day (assuming an account has $ 35,000 after the day's trading, then the excess here is $ 10,000 because it exceeds that amount and is above the minimum requirement of $ 25,000. This would give a purchasing power of $ 40,000 (4 x $ 10,000)., the trader receives a daily trading margin call from the brokerage firm. There are five business days to answering the margin call During this period, the purchasing power of daily trading is limited to twice the excess of the maintenance margin, the call is answered best broker in India for forex.

Example of Trading on Margin

Suppose a dealer has $ 20,000 more than the maintenance allowance. This gives the merchant purchasing power for daily transactions of $ 80,000 (4 x $ 20,000). When the dealership received $ 80,000 from PQR Corp. at 9:45 a.m. purchases, followed by $ 60,000 from XYZ Corp. at 10:05 am the same day, exceeded its purchasing power limit. Even if he sells both later during afternoon trading, he will receive a daily trading margin call the next day. However, the trader could have avoided the margin call by selling QPR Corp before buying XYZ Corp.

The Bottom Line

Intraday trading on margin is risky and should not be attempted by beginners. People with intraday trading experience should also be careful when using margin. Using margin gives traders greater purchasing power; However, it should be used wisely for day-to-day transactions so that traders don't suffer big losses. By limiting yourself to the limits set for the margin account, you can reduce margin calls and therefore the need for additional funds. If this is your first time trying day trading, don't try it with a margin account.

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