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The stock market is an ever-dynamic environment. Placing orders at the right time and price is exceedingly crucial in making profits. A lost opportunity can impact your portfolio to a large extent. So, you definitely don’t want your transaction to get cancelled or rejected, correct?
Well, it is beyond your control where the non-execution is because of the unavailability of matching orders. But, here is a significant, controllable factor that can reject your transaction for not being prudent enough. It is the ‘available limit’ for trading in your account.
Today’s article discusses what is limit in the share market, available limits, margin limits and related factors across different products.
What is the concept of available limit to trade?
The available limit to trade, as the name suggests, is the amount of funds available for trading. It includes the funds invested by the trader and the margin funds taken as loans from the broker.
The available limit changes each day as the balance varies with each transaction.
The three limits you must look out for in your demat account are the available limit, the utilised limit and the total limit.
- The available limit shows the amount available for daily trading in the share market for each security, like futures, options, stocks, intraday trades, etc.
- The utilised limit shows the amount traded per day under each category of security.
- Total limit acts like a ledger account showing the combination of available and utilised limits. It shows the original limit, the utilised amount and the remaining limit under each category.
Checking the different limits in your account is essential, as an order gets placed only when it is within the limits.
Margin limits for trading
Margin, in this context, is a loan that brokers provide investors. Margin allows traders to take larger positions than they can afford to.
Traders can request for a Margin Trading Facility (MTF) with the broker. The broker asks the trader to pledge collateral in the form of cash or securities. So, once the margin trading account is open, traders can deposit a particular amount as collateral, based on which the broker lends loans.
For example, if a trader wants to enter into a transaction for ₹50,000 but doesn’t want to invest the whole amount at once, he can ask the broker for a margin facility. Let’s assume that the broker demands 10% as the collateral, which is ₹5,000. The broker will lend the balance of ₹45,000.
The amount so lent forms one part of the available limit for trading.
Also read: Margin trading: Exploring the risks and rewards
Intraday limits
Apart from the amount that the trader deposits and gets as a margin from the broker, the available limit also includes the sale proceeds of securities.
In January 2020, the Securities and Exchange Board of India (SEBI) passed a new rule about the sale of proceeds in intraday trades. According to this 80% of the sale proceeds in intraday trades will get credited and become a part of the available limit. The remaining 20% gets credited one day later.
If the first transaction of the intraday trade is a sell trade, traders must place a buy order to square off the position. If the price of the share while buying it back has increased beyond 80% of the sale proceeds, traders must bring in additional margins to complete the transaction.
Also read: How does intraday trading work?
Quantity freeze limits for indices
Quantity freeze limit is the stock exchange’s way of controlling the demand for securities. It is where the exchange sets a cap on the number of units a trader can place per order. A unique higher limit is set for each security in the market.
Such upper limits for trading in indices refer to quantity freeze limits for indices. It freezes the order upon reaching the maximum limit.
So, investors who place large orders must be well aware of the limits for each security and divide their transactions into multiple orders to stay within the quantity freeze number.
Quantity freeze limits trades by monitoring the volatility of stocks and ensuring it does not go beyond controllable boundaries. It also tries to reduce market manipulation activities by large investors.
Bottomline
Every brokerage application provides a section representing the available limit in the trader’s account. The application format and the numbers’ presentation may vary, but the concept remains the same for all brokers. Hence, irrespective of the brokerage firm your demat account is with, you must check the available limit before placing each order to ensure your order does not get rejected.
Also read: Margin trading: Exploring the risks and rewards
FAQs
According to a circular issued by the NSE, the freeze limits for entering derivative contracts with the below underlying indices are
BANKNIFTY – 500
NIFTY – 1800
FINNIFTY – 1800
MIDCAP NIFTY – 4200
The only way to do so is by splitting the number of trades and placing multiple orders. However, this can complicate the process, as traders will have to monitor more orders, and the total transaction cost will increase, too.
No, there is no limit for intraday trading. This does not mean that the concept of available limit is inapplicable here. Available limits must be considered. But, there is no limit on the number of intraday trades an investor can enter.
Investors can increase their available limit by transferring more funds to their demat and trading accounts. They can also do so by squaring off more positions, as the sale proceeds will get credited to the available limit. Else, they can ask the broker for more margin.
While margins help investors enter large trades with minimum capital, it is also risky. Non-repayment of margin amount can lead brokers to sell the pledged shares in the market.