Editor’s note: This article was first published in August 2012; the intraday trading conditions it describes, including La Caixa’s plan, fees, cash requirement, closing times and penalties, are those of that time. La Caixa’s banking business has since become CaixaBank.
Some brokers (banks) let you invest more money on the stock market than you actually have in your account. In other words, if you only have €2,000, you can invest €10,000. This is margin trading, and it is intraday: as the name suggests, the bank grants you credit that is only valid for one day (one trading session). Here is a simple explanation.
I imagine some banks offer this option and others don’t, and the conditions will also vary with the broker, the type of account and so on. To give a concrete example, these are the conditions offered by La Caixa (the broker I currently use): with the Bolsa Plus Activa plan, you can make 2 intraday trades for €7. All La Caixa asks is that you have 20% of the money you are going to invest in your account. That is, if you are going to invest €10,000, you must have at least €2,000 in the account linked to your trading account.
How it works
If we invest €10,000, the bank automatically holds back €2,000 (20%). Once we sell the shares, the balance is updated: we get the €2,000 back plus any gains, or, if we have lost 5%, €1,500.
The key condition
This kind of trading requires you to have no open positions by 17:15. Your balance of shares bought on credit must be back to zero. Otherwise, the bank will automatically sell any shares you still hold and charge you a fee as a penalty (around €30 per stock).
Pros and cons of intraday margin trading
The advantage is very clear: with a minimum of capital you can make a much larger investment, and so earn profits on €10,000 instead of €2,000.
One of the disadvantages is just as clear: in the same way that your profits are calculated on €10,000, so are your losses.
Another drawback is that if a stock is suspended from trading, the bank will still charge you the penalty fee if the position could not be closed before 17:15. If there is a technical error like the one we saw today on the IBEX (suspended from trading for 5 hours) and we are again unable to close the position before the deadline, we would also be penalised.
And finally, another disadvantage is simply being forced to close the trade on the same day, since the next day that stock could keep rising. You also miss the last 15 minutes of the session, when the most shares change hands.
Even so, it is a good service that people without enough capital to trade on the stock market can make the most of. That said, this kind of trading is the perfect way for someone without much experience to lose all their capital after 2 or 3 sharp market moves. That is why you should think twice before deciding, unless you are very sure of what you are doing.
Featured image: Zarateman, CC0 1.0, via Wikimedia Commons.
