Explained: What Will New Sebi Margin Rules Mean For Intraday Traders

Traders focus on the liquidity of the stock to check whether the stock is fit for intraday or not. Intraday traders need to have a lot of patience and conviction. It requires you to plan your actions based on the market liquidity. Intraday traders look for the most volatile sector during the early market hours. A long or short position is taken based on the price action. 

The majority of intraday traders depend on margin trading. In the case of margin trading, traders borrow funds from the broker to buy or sell assets in large quantities. Margin trading increases the buying power of a trader which in turn increases the potential to make more profits. 

Intraday trading is risky as compared to other trading techniques such as positional or swing trading. The profit margins of intraday traders are lesser as compared to a swing trader. Even small price movements in the right direction can bring  a hefty sum of money to the intraday trader as they trade in large quantities. 

Intraday Traders Contribute To Liquidity In The Market 

Intraday traders help in increasing the liquidity in the market. Daily buying and selling of securities also increase the volatility in the market. Regular buying and selling based on demand and supply attracts more volume in a specific stock or index. 

Intraday traders offer a better perspective on the global markets as they have to keep track of all the global cues. Even a single bad news can affect their position and let their profits go into deep loss. 

Hedging is one of the most important trading concepts that intraday traders have to keep in mind. Usually, intraday traders have exposure in different asset classes such as Forex and commodities. Traders use these markets to hedge their position and minimize the risk of losing capital. 

Day traders are one of the major sources of income for brokers as well. Traders who take margin to day trade, pay a large part of their income as commission to the broker. Usually, the profit amount is high, therefore traders can afford to pay a high commission to the broker.  

These were some of the major contributions of a day trader in securities markets. Let us now understand why the new SEBI rule is against intraday traders. 

New Sebi Margin Rules Meaning For Intraday Traders

As per the new rule which was announced by SEBI in 2020, brokers need to collect the margin money upfront Unlike earlier, when brokers had a habit of collecting the margin amount at the end of the day. This rule has been named as the peak margin rule. It was introduced to protect brokers from providing extra margin to their clients. In return, brokers charged a huge commission to their clients. 

Brokers will be penalized if they provide a margin over and above the prescribed limit. Before giving out extra leverage, brokers do a standardized portfolio analysis for derivatives positions. 

New Rule By SEBI Affects The Community Of Day Traders

The reduced leverage will affect the buying power of the intraday trader and thus, will affect the liquidity in the market. It can also affect the price discovery mechanism in the stock market. 

Conclusion

The most frequently asked question among beginners is how to open a demat account along with trading account. The answer is quite simple. To open a demat and trading account, look for a suitable broker. The broker will provide you an application form along with the list of documents. The application form then goes under the verification process. Once the verification is complete, the broker will provide you the login credentials and you are all set to trade. 

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