The stock market offers different opportunities for different types of investors with varied financial goals and trading experience. Depending on their experience and risk appetite, you can choose a trading style. If you have enough experience in the stock market and you can determine the trends and patterns of a security movement near to high accuracy, you can benefit from margin trading. Before explaining the Margin Trading Financing benefits, you should understand what Margin Trading Financing is exactly.
Explanation on Margin Trading Financing
Marginal trading financing (MTF) is the facility of trading with more than the available funds. Margin trading meaning can be understood as the availability of loans for intraday traders with the stockbrokers. When you trade using MTF, your stockbroker funds your trade. You can buy securities by paying a part of the actual trade value. As per the Securities and Exchange Board of India (SEBI), you can pay this margin amount in cash or in the form of Demat securities.
Margin trades are leveraged trades that can magnify your returns if the trade goes as planned. Money that you receive in your margin trading account is borrowed funds from your stockbroker, and you need to repay it with interest later. Otherwise, you need to bear huge losses as you have dues of remaining trade value and interest to pay to the broker. Thus, there is potential for higher returns but at high risk.
Let us say you have Rs. 10,000 in your online trading account, and you want to trade shares of company A trading at Rs.50. For a normal trade, you can buy a maximum of 200 shares with the available funds. On the other hand, if you make a margin trade, say, your broker can provide you with Rs.20,000, you can buy 600 shares by paying margin upfront only from your pocket. If the share price rises to Rs.60, your profit will be Rs. 6,000 (instead of Rs. 2,000 for a normal trade).
This seems too good but look at the opposite side also. If the stock goes down to Rs. 50, you have to bear Rs. 6000 plus, you need to repay the funds to the broker along with the interest amount.
Features and Benefits of Margin Trading
Bet on bigger trades
Margin trading allows you to bet on bigger trades than you would with available capital with you as you can leverage your position with the borrowed amount. The MTF limit available for the trader depends on the type of asset being traded and the trade value.
Higher profit potential with lower investment
You can buy more securities with the MTF; hence more profits provided on your trade goes right as per your analysis and determined trend.
Flexibility
MTF provides you with trading flexibility to hold your securities. However, you should also consider the interest paid to your broker. The longer the margin trade, the higher the interest amount.
Safety
SEBI closely monitors margin trading, and it continuously frames and amends the rules in the interest of traders.
Utilise Demat Securities
You are allowed to collateralize existing shares in your Demat account as the security for margin. Make sure you have analyzed the security movements well before making the margin trade on it. Otherwise, if you fail to pay back the borrowings, the broker has the right to liquidate your collateralized securities to recover borrowed funds. While enquiring about open demat account charges, enquire about the type of demat securities allowed to be collateralized by a broker.
Margin trading can offer you an excellent opportunity to maximize your returns, but it has a high-risk appeal also. Therefore, it is necessary to consider the risk involved besides the potential for higher returns. Maintaining a minimum balance in your margin account is mandatory to avoid forceful liquidation.
MTF differs from broker to broker. You should also check the margin multiples, interest rate, and flexibility to hold a trade while opening your trading account.