How to Use Margin Trading to Hedge Your Portfolio?

In this article, we will discuss

• What Is Margin Trading?
• Things to Consider While Practising Margin Trading in India
• Risks Associated with Margin Trade
• Why Should You Switch to Samco’s Margin Trade?
• Final Words
• Frequently Asked Questions

Every stock market trader will have come across the phrase, “Do not place all your eggs in one basket”. This age-old quote focuses on the importance of portfolio diversification. By diversifying holdings in your portfolio, you can hedge your profits against major losses owing to market volatility.

Margin trading is one such practice that can help you to hedge your portfolio against the unpredictable nature of the market. If you are a trader with a large position you cannot afford to lose, keep reading till the end to learn about hedging with margin.

What Is Margin Trading?

Margin trading or leverage trading is the practice through which traders aim to enhance their capital growth by buying stocks more than their initial limit. To go ahead with this, you borrow funds from your broker by offering cash or stocks as collateral (margin).

By receiving funds from a broker, you get to buy stocks or futures and options at a marginal value through the use of leverage. The borrowed sum along with the interest can be settled when traders square off their position in the stock market.

With this trade, traders have access to larger capital than they currently find in their portfolios. This can help them leverage their position which boosts their purchasing power and amplifies potential profits. For futures and options trading, traders are required to pay a margin to initiate every contract.

However, it is important to note that this form of trading comes with a certain degree of risk. Therefore as a trader, you must be well aware of your risk horizon and finances before trading with margin money.

How Does Margin Trade Work?

To focus on capital growth with margin trade, traders must open a MTF account. This account is different from a regular demat account to trade with stocks. The broker will disburse the borrowed amount to the MTF account.

To start trading, you are required to offer a certain sum as an initial margin based on the value of the stock and its volatility. As you are borrowing funds from your broker to participate in this trade, the latter will charge interest for the same. You can avail the loan in an MTF account against collateral which is referred to as 'minimum margin'. You can pledge this collateral in the form of cash or securities purchased. 

For futures and options trading, you need to pay a margin to cover the risk of defaults. You also need to maintain a certain balance in your margin account. This is called the ‘exposure margin’.

How Can Margin Trading Help to Hedge Your Portfolio?

Here is how margin trade can help traders help them in hedging their portfolios.

• In simple terms, hedging means holding the opposite position as insurance to avoid potential losses from your current investments. For instance, if you notice some of your stocks might underperform, you can buy futures and options that offset your position. With futures, you need to offer a substantial margin to cover the risk of unlimited losses.

• Moreover, this trade is a great strategy for traders aiming for short-term capital growth. If you are one such trader but your portfolio does not hold enough shares to help in capital growth in a small span, this form of trading can help. You can use margin to execute complex trading strategies that limit downside risks via hedging while providing high potential profits.

• It is important to note that this type of trade is not a fool-proof plan for portfolio diversification and hedging. This can involve extra costs and interest charges which can burden your trading expenses and eventually your finances.

• Trading with margin lets you hedge your risks and allows for higher gains. As long as you can cover your margin requirements or finance the margin interests, you are good to go. Thus, you can make larger trades to earn high returns in a short time with this facility. 

Things to Consider While Practising Margin Trading in India

Here are a few things that you must keep in mind while practising margin trade in India.

• You must be very careful while managing a portfolio with this trade. It is important to remember if you are buying high-return stocks, you can also incur high losses. Therefore, consider balancing your portfolio with high, regular and medium-return stocks. 

• This trade involves getting a loan from your broker which carries a certain interest rate. Thus this amount will accrue interest compounding periodically till your debt is clear. 

• Consider avoiding the temptation to borrow the maximum amount to your MTF account. Instead, you can develop a cautious approach towards the financial market when using the MTF. 

• You can also opt for a margin calculator to decide how much margin you need to go ahead with your trade. This will help you borrow an amount keeping your financial situation in mind. 

Risks Associated with Margin Trade

Hedging with margin trading bears a certain degree of risk. Here are a few risks that you must make note of:

• The trade costs can be highly expensive and might burden your finances if you are unable to meet your debt on time. 
• Timing is everything when it comes to hedging with margin trading. If a trader fails to predict the market movement correctly before purchasing stocks with margin money, they might not make enough profit. This can eventually burden their finances as it does not help with capital growth goals.
• Hedging can give a false sense of security to traders. Although with hedging, you can minimise your losses, it does not eliminate them. Even after using hedging to safeguard your portfolio, an unpredictable market shift can lead to losses. 

Why Should You Switch to Samco’s Margin Trade?

Samco brings to you its new MTF facility to conduct margin trade and get 4 times more leverage with cash balance. Here is why you should switch to Samco’s margin trade app right away. 

• You can enjoy several features on this platform like live option Greeks, My Trade Story and TradingView charts for free. Along with these, this platform offers several benefits worth Rs. 30,000. 

• More than 4 lakh traders have used this platform to improve their performance in the stock market with Andekha Sach. 

• Samco’s MTF account offers four times leverage and zero MTF to its customers. 

Final Words 

As a trader, you must remember the importance of hedging with margin trading as a wise practice. However, it also comes with a certain degree of risk that can hamper your finances if not taken care of. Therefore, if you are a new trader, consider having a clear knowledge of your risk appetite and financial goal before opting for this strategy.

You can also explore the Samco new-gen trading platform and open an online trading account and MTF account to grow your capital with this. With StockPlus, you can trade as collateral.

Frequently Asked Questions

1. What are SEBI’s guidelines to monitor margin trade?

Ans. Previously, brokers and traders conducted margin trade only through cash as pledging shares as collateral was not allowed. However, SEBI issued new regulations in 2018 allowing traders to leverage shares as collateral to participate in this trade. Only brokers with authorisation from SEBI can offer margin trade facilities for safe trading practices.

2. How can I participate in margin trading?

Ans. To participate in margin trade, you must have a MTF account. This account should have a minimum balance; otherwise, your trade will be squared off.

3. How can I determine the margin for margin trade?

Ans. Margin is the amount which you need to offer to your broker to take part in margin trade. This margin percentage is computed by taking into account the current market value of your portfolio. This will act as collateral assuring you will complete your trade.

Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847