Margin Trading Facility: Meaning, Benefits, Risks and More

In this article, we will discuss

What Is the Margin Trading Facility?

Margin Trading FacilityUsually, traders have to analyse several factors and patiently wait for the right moment to execute a profitable trade. But, when a good trading opportunity comes, should they just pass it away due to the lack of adequate funds?The answer is no. They can simply opt for the Margin Trading Facility (MTF), which will effectively increase their purchasing power. Keep reading this article to learn how this works.

Margin Trading Facility – A Deeper Dive

Margin trading is a facility offered by brokerage firms that allows traders to purchase securities even when they are short on funds. By opting for it, individuals can buy assets with borrowed funds after paying only a fraction of the transaction value.This payable amount is called the margin and thus this facility is known as the margin trading facility. Interest is charged on the borrowed amount on a daily basis.For paying the margin amount to your broker, you can do it either in cash or offer shares as collateral. However, in the case of the latter, there will be a certain percentage of deduction in value. Some brokers will even allow a mix of stocks and cash for this purpose.The broker covers the remaining transaction value in the form of a loan. Interest will be applicable on this amount and you can settle the entire sum while squaring off your position.As per the Securities and Exchange Board of India (SEBI) guidelines, you must pledge the shares you buy using MTF. What’s more, you have to complete this process by 9:00 PM on the date of purchase to avoid your assets being squared off on T+6 days.

How Does the Margin Trading Facility Works?

Let’s take an example to understand how margin trading works:Suppose, you have spotted an excellent trade opportunity for which you need to buy shares worth ₹10 lakh. However, you have just ₹1 lakh in your bank account. So, you decide to buy the assets using the margin trading facility. In this case, you can buy the shares by only paying a fraction of the transaction value, which is ₹1 lakh in this case. Your broker pays the remaining ₹9 lakh. In this situation, you have used 10x leverage on your initial investment, i.e. the margin. In other words, you have multiplied the potential profits by ten times by increasing your order magnitude (from ₹1 lakh to ₹10 lakh).https://www.youtube.com/watch?v=eMhtCWN6PjU

Advantages of Margin Trading Facility

The benefits of using MTF are as follows:

  • Safe and Secure

The margin trading facility is a secure way of borrowing credit to purchase securities. The reason is- only SEBI-registered brokers who are subject to the scrutiny of stock exchanges can offer this service.As traders pledge their purchased stocks to avail MTF, its interest rates are typically lower than unsecured loans. This makes it a sustainable credit option in comparison to a personal loan.
  • Long Holding Periods

The position that traders create by opting for margin can be held for a maximum of T+N days. Here, N refers to the number of days this position can be carried over. Whereas, T refers to the number of trading days.The value of N tends to vary across brokerage platforms and usually depends on a trader's relationship with a lender and the value of the pledged securities.
  • Enhances Purchasing Power

This facility allows traders to leverage the securities present in their Demat account and increase their purchasing power. By taking a margin against cash, they stand the chance of improving their returns on their invested capital.
  • To Capitalise on Short-term Movements

The margin trading facility can be an effective tool for capitalising on short-term price movements. This is because traders can use a margin to buy a large volume of stocks by paying a small amount, which increases their leverage. This enables them to book substantial profits from short-term price fluctuations.

Risks Associated With Margin Trading

Despite all the benefits, a margin trading facility also comes with a set of risks. Some of them are listed below:
  • Obligation to Maintain a Minimum Balance 

To avail an MTF, traders always need to maintain a minimum balance in their margin accounts. Failing to do so will compel brokers to sell off some of their assets in order to maintain the minimum balance amount.
  • Asset Liquidation 

In case individuals fail to adhere to the terms of the margin trade agreement, brokers have the right to take several actions. For instance, if traders are unable to meet a margin call, the broker has the full authority to liquidate their assets in order to recover the sum.
  • Enhanced Losses

Margin trading can be an effective way of increasing profits. However, there is also the chance of losing more than the invested principal. Moreover, traders have to pay interest on the borrowed amount.Thus, to book gains using MTF, profits from trades must be high enough in order to cover such expenses.
  • Approved for Only a Selected Range of Securities

Traders cannot use the margin trading facility to buy all types of stocks. SEBI has a specific list of assets for which brokers can offer this facility. Many a time, brokerage firms have removed some stocks from this list for security reasons.Apart from this, margin trading is also not allowed for securities in the derivatives segment and mutual funds.

Things to Remember Before Opting for Margin Trading

Before going for MTF, traders should keep certain things in mind. They are as follows:
  • Consider Borrowing for Shorter Durations

The margin trading facility requires individuals to pay interest on the borrowed amount. The longer they keep it, the higher will be their chargeable interest. Thus, experts advise settling the margin within a short duration to reduce interest payments.
  • Increase Margin Utilisation at a Sustained Pace

When starting out with margin trading, it is a good practice to borrow less than the maximum limit. Traders can start with small amounts and after completing a considerable number of successful trades, they can slowly increase their margin utilisation.Doing so will ensure that even if they incur losses at the initial level, they do not lose their entire capital.
  • Always Use a Stop-Loss Order

For every stock which traders buy using margin, they should use a stop-loss order. It is a type of order which automatically sells off securities when the asset price hits a certain level. Utilising stop-loss orders properly will enable individuals to reduce the magnitude of losses in case the market moves against their expectations.
  • Try and Avoid Margin Calls

In the course of trading, it may happen that traders forget to maintain the minimum balance set by the broker. Under such circumstances, the latter can issue a margin call. It is a situation in which the broker requests the traders to meet their minimum balance requirements by depositing money or securities.Traders can avoid margin calls by keeping extra cash in their margin accounts and regularly tracking their margin usage. They can also set their own utility limits to ensure that the broker’s margin balance is maintained at all times.
  • Understand the Broker’s Terms and Conditions

Before utilising the margin trading facility, traders should take into account all the applicable terms and conditions set by the broker. They should assess the minimum balance, rate of interest, holding period, etc., to prevent any hassles later on.
  • Create a Backup Fund

Traders should know that the market is unpredictable and several events can cause a market crash. Under such circumstances, margin traders can incur huge debt from which they may take a long time to recover.To prevent such a scenario, they should create a backup cash fund. It will help them prevent a margin call, buy new stocks to mitigate risks and reduce the strain on their personal finances.

Why Choose the Samco App for Margin Trading Facility?

When you plan to participate in margin trading, choosing a brokerage firm which can provide you with the highest leverage options is essential. In this regard, Samco is the ideal choice.Here are some of the benefits you get by trading with Samco:
  • High Leverage: You can get up to 4X margin for equity delivery with brokerage charges as low as ₹20/executed order. Moreover, you can avail up to 20X margin for options, 33X for intraday trading, 80X for commodities, and 100X for futures.
  • Convenient Trading Facility: Apart from this, you can execute your trades with just a single click and getmargi live notifications for all your pending and completed orders. You can also get personalised notifications on your favourite stocks and real-time profit and loss updates on your trade positions.
  • Timely Alerts and Notifications: Samco ensures to deliver timely alerts for your preferred trading instruments. You will also get live notifications of pending and executed orders and the latest updates of stock market news.

How to Start Margin Trading with Samco?

Activating the margin trading facility is super easy. The steps are:
  • Step 1- Open the app and tap on ‘Accounts’ on the top-left part of the screen.
  • Step 2- Click ‘Manage My Subscriptions’ and then on ‘CashPlus Subscription’.
  • Step 3- Read and accept all the terms and conditions.
  • Step 4- Pay the ₹1 subscription fee via your debit/credit card, ledger or net banking.
Now, you will get the benefit of high delivery leverage across 500+ stocks.

Conclusion

The margin trading facility (MTF) is an excellent perk that enables traders to maximise their buying power and capitalise on favourable market opportunities. But, given the fact that it is a high-risk high-reward strategy, individuals must assess their risk tolerance levels before taking any decision.You should take all the necessary precautions like having a backup cash reserve for emergencies. Then, equipped with the 4X margin against cash balance with Samco, you will be fully ready to start!

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