What are the Benefits of Margin Trading facility

Margin Trading allows investors and traders to use cash or securities as collateral for purchasing more shares. You can earn profits on market fluctuations within a single trading session in margin trading. Investors can profit significantly where you just need to pay a fraction of trade value in the form of a margin. In addition, you can participate in margin trading for a Day and margin trading for a long duration. 

What is Margin Trading Facility?

The Margin trading facility allows you to buy stocks which you may not be able to afford because of their high prices. One can buy a stock by making a payment of the marginal amount of its actual price value. You need to pay this margin in cash. Alternatively, you can use your existing shares as security.  You can consider the Margin trading as leveraging positions in the market.  Your broker funds your margin trading transactions. The margin can get settled later when you square off your position. You make a profit when the profit earned is much higher than the margin; else, you suffer a loss. 

You must have understood what margin trading facility all about. Now, let’s discuss the advantages of the margin trading facility.

Features of a Margin trading

The unique features of margin trading make it worthy for investors and traders to enter. Mentioned below are the features of margin trading. 

• SEBI, along with other stock exchanges, pre-define securities that are margin traded.
• You must look for the brokers in India who took permission from SEBI to provide margin trade account facility 
• There is a way of carrying forward the margin positions for a maximum of N+T days. Here, N means the number of days, and T means the trading days.
• Make sure to accept the terms and conditions of your broker to open an MTF account. By accepting it, you acknowledge that you know the benefits and risks involved. 
• Margin trading helps you leverage positions in securities that come under the derivative segment.

What are the SEBI Regulations in India?

Gone are the days when investors and traders used to use cash for margin trading, even though there was no permission for providing shares as collateral. At present, investors and traders can provide shares as collateral to build positions in margin trading as per the Securities and Exchange Board of India (SEBI). SEBI is the regulatory body in India whose task is to monitor the margin trading facility. 

What are the Eligibility Criteria for Margin Trading?

Margin trading facility is available through stock brokerage firms, but you need to open a margin account. Different brokers offer different margins. You need to pay an amount for an MTF account opening and maintain a minimum balance at least every time. If there is no sufficient balance in your MTF account, then there will be a chance that your trade will get closed automatically. Thus, you compulsorily close your positions at each trade session’ end. 

The Benefit of Margin Trading Facility

Here are the following benefits of margin trading. 

• Profit from price fluctuations: Investors willing to make profits on the market fluctuations over a short duration must opt for margin trading. 
• Leveraging your position: You can avail of the leverage strategy because you can get maximum exposure in the market with a small amount of your portfolio.
• Get quick returns: Although there is a chance of earning significant returns, you can generate returns quickly due to the continuous price fluctuations. 
• Collateral: Margin trading allows you to use financial assets in your portfolio as collateral. 
• In a margin trading facility, you can improve the rate of return on the capital you have made your investments.
• You can improve your purchasing power through a margin trading facility.
• Every investment in the stock market comes under the monitorization of the market watchdog SEBI, and they do it continuously as their job.

Good Margin Trade Practices

Here are the following good practices on margin trading: 

Invest wisely

Investing through margin trading may be very cautious. It is possible to identify both losses and profits in margin trading. If your margin trading strategy goes well, there will be a chance to gain profits. Otherwise, there will be a loss in margin trading. Make sure you have sufficient cash in your margin trading account; otherwise, you will have to compulsorily sell your assets in your portfolio to meet the minimum balance requirements. 

Borrowing Lesser As Compared to Allowed Limit

You should not borrow the total allowed limit. Trying out for a smaller amount upfront will help you see how it is going. Margin trading is a must-trade activity for those willing to take risks and make good profits. 

Borrowing should be for Short term

Margin is similar to a loan because there will be interest on it that you need to pay. Therefore, it is essential to have a margin settlement at the earliest to avoid accumulating higher interest.

Conclusion

Margin trading is a way to gain significant returns on investment by taking the benefits of leverage and other essential factors. You should be aware that the stock market is a volatile entity. Thus, you may face challenges while leveraging your positions. You must have the proper knowledge before entering into margin trading.

Frequently Asked Questions (FAQs)