Intraday trading and delivery-based trading both come with their own pros and cons. Traders or investors use them in their trading strategy as per their investment goals and return expectations from the market. A margin trading facility (MTF) is available for both types of trading with different rules and regulations set by the regulatory authority and exchange allowing the traders to leverage their investment for better returns.
The MTF differs for intraday trading and delivery based trading, offering traders the opportunity to trade in high value stocks with limited funds. As the rules and regulations governing MTF vary for both the types of trading, it is important to understand which option suits you the best. This article provides an overview of MTF for both intraday trading and delivery-based trading, outlining their pros and cons.
What is Intraday Margin?
The MTF for intraday trading means, traders get the margin to trade in the stocks with a value more than funds available with them for the same day trading. Intraday margin works only for day trading in which you can buy and sell your share or vice-versa and square off all your positions before the closing of the market on that day.
When you trade intraday with MTF, and if the stock price moves abruptly you need to maintain the minimum margin otherwise brokers have the right to liquidate your trade positions whether it is profit or loss. But before doing that you will get a margin call from your broker. The margin facility for intraday could be much higher but riskier than the MTF offered for delivery-based trading.
What is Delivery Margin?
Delivery margin is the minimum amount you need to keep in your trading account when you purchase shares and are ready to take delivery of the same. It means when you buy a stock in a particular quantity, then based on the market price and total value of the trade you need to maintain a minimum amount.
It is the margin money required to become eligible to take delivery of shares into your demat account but you will get shares when you pay the full amount before the day of the settlement of the share delivery. As per the current rules, for delivery margin, you need at least 20% margin of the total value of trades.
Recommended Read: Margin Trading Facility with 4x Leverage
Difference Between Intraday and Delivery MTF:
| Aspects | Intraday Margin Facility | Delivery Margin Facility |
| Settlements
|
The settlement of margin in intraday trading is for the same day, hence traders need to fulfil all the margin requirements before the end of the trading session. | You need to maintain the initial and maintenance margin at the time of share purchase and arrange the total funds at the time of settlement of delivery of shares.
|
| MTF Ratios | For intraday trading, MTF is available up to five times the available funds. But, most of the brokers allow utilizing the 3x to 4x margin to their clients. | Here you need to deposit at least 20% margin of the transaction value at the time of purchase of the shares and this amount is blocked in your account. |
| Types of Margin | Upfront margin and Mark-to-Market are the two types of margins used in intraday trading. | There are two types of margins, initial margin and maintenance margin in delivery trading. |
| Margin Calls | Due to high fluctuations in the price of the security, you get margin calls to maintain the minimum margin as per the value of total trades. | There are no such margin calls here, instead, you have to deposit the initial margins to enter into the trade for purchasing the shares. |
| Margin Penalties | For intraday trading, the margin shortfall continues more than 3 sequential days and attracts a penalty of 5% applied to each further margin shortfall. | There are no such margin penalties, instead, you will be not allowed to buy any share or enter into any trade position in the delivery-based trading. |
Pros & Cons of MTF for Intraday and Delivery Trading
Advantages of Intraday Margin Trading
High leverage provides the opportunity to trade in high value of trade with low funds available. This leveraging helps to improve the total return on investment and enhance the purchasing power of the traders. Apart from that you can also use the shares in your demat account as margin or collateral security for intraday trading.
Intraday margin facility allows traders to enter into high-risk trades by depositing a certain amount of money as a margin to enter high value trades. And the rate of interest charged by the brokers offering intraday margin is lower compared to other long-term margins.
Advantages of Delivery Margin Trading
Trading with delivery margin, traders can enjoy various benefits making it easier for them to purchase the shares from various classes. Unlike intraday trading, in the delivery margin, you don’t need to maintain the mark-to-market on a daily basis that arises due to fluctuations in share price. Here you don’t have any risk of forced liquidation due to margin shortfall that is very common in day trading.
Here you can also pledge your shares from exiting holdings to use as collateral security for delivery margin trading. Using the delivery margin, you can purchase the share by depositing only 20% of the total trade value and you get time till the settlement to deposit the remaining amount and take delivery of shares.
Disadvantages of Intraday Margin Trading
One of the biggest risks of using the margin trading facility for intraday traders is the potential to incur huge losses due to high leverage. Another drawback of intraday trading is due to high fluctuation in security price, if you fail to deposit the margin shortfall during the trading hours, your trade positions will be squared off by your broker resulting in losses.
Disadvantages of Delivery Margin Trading
When trading with delivery margin, a certain amount of capital remains blocked until the shares are settled. Another disadvantage of delivery margin is the delay in share credit caused by the settlement cycle or technical failures, which may result in missing out on corporate action benefits.
The funds you get as a margin for intraday trading are chargeable with a certain amount of interest by the brokers, while in delivery margins the funds blocked in your account as a margin don’t earn any such interest. During a highly volatile market, the margin ratio is tightened and certain shares are restricted with circuit limits, restricting your chances of earning higher profits.
Recommended Read: How Leverage can Boost your Investments
Conclusion
MTF is available for intraday as well as for delivery trading with different terms and conditions. In day trading, you can get facility trade from three to five times the funds available in your trading account. While in delivery margin at the time of purchasing the shares, you need to deposit at least one-fifth of the total trade value of shares and the remaining amount you can deposit before the day of settlement.
Intraday margin trading is riskier than delivery margin trading, as you have to maintain the margin shortfalls during the trading hours and if you fail to maintain the minimum margin, your trade position will be liquated and you can incur losses. To use the intraday margin facility you also need to pay interest on the extra funds you are utilizing for trading. Delivery margin is more suitable for low-risk investors, while intraday margin trading is suitable for high-risk traders with high leveraging facilities.
Learn More About Margin Trading