Oct 17, 2022 Value Broking 7 Mins 2.9K

The Indian stock market provides a great opportunity for people in India. There are a plethora of stock trading activities, including margin trading. 

Margin trading is an effective option for those who want great exposure with minimum money in the market. However, to participate in margin trading smartly, you should know why you should consider this trading activity. 

Why Does Margin Trading Matter?

Margin trading means having financial leverage. It allows you to buy more stocks with lesser funds. As a result, you can avail of short-term trading without worrying about share delivery and having adequate funds to take full delivery. 

While paying a fraction of transaction value to purchase or sell stocks, there will be two options – cash or as collateral. A few years back, investors and traders could use cash only to participate in margin trading. 

You can use shares as collateral as this activity has been approved by India’s Securities and Exchange Board (SEBI). You can avail of the ultra-short-term opportunity. 

How to Start Margin Trading?

You will have to activate the margin trading facility to avail the margin trading facility one time during the initial period. Here are some ways to activate your margin trading. 

  • Make a request using your registered email.
  • Quote relevant codes and a Demat code. 
  • Send a written signed letter. 
  • Call your Equity advisor using your registered phone number. 
  • Make a call to your broker’s call center support.
  • Request your trading account. 
  • Request through your stock broker’s trading app.

It is excellent to go with your existing trading account and Demat account to activate the margin trading facility without worrying about opening a new margin trading account. Make sure that your Demat account gets linked to your trading account. The activation of the margin trading facility takes place between 24 to 48 hours. 

After getting the margin trading facility activated, the shares’ value kept in the Demat account will come under eligibility automatically owing to margin depending upon the stock closing value of the previous day. You will automatically get dividends credited to your Bank account linked to your Demat and trading accounts. 

Features of Margin Trading

Here are the following features of margin trading. 

Margin Trading Facility Only from Authorized Brokers

The regulatory body for the stock market in India, SEBI, monitors margin trading. As per the regulations in 2017, brokers can access the traders’ assets that are useful for margins. There can be a situation where a broker can use this margin without informing an investor. It can be against the investor’s interest. 

At present, stockbrokers are asking to offer a margin trading facility to investors and traders in India. However, as per the SEBI’s rules and regulations, brokers must use collaterals kept as margins only for margin trading. 

Position Getting Carried Forward to T+N Days

There is a chance to close trades using the margin facility for more than one day. Position and swing traders, and those whose positions’ opening and closing take place on different days. The positions can be open for T+N days, T means 
rnthe day when the position got opened while N means the number of days the position can get closed.

Not All Stocks Available on a Margin

The most important thing to notice is that you can’t trade every stock on margin. You can buy several financial assets like penny stocks and Initial Public Offerings (IPOs) because these assets come with pretty high risk.

A Separate Account is a Must 

To avail of the margin trading facility, you must create an account that follows the terms and conditions of maintaining this type of account and storing cash or shares in collateral. A stockbroker can use the right to close the position during any loss due to insufficient margin. 

There is a high chance of losing assets as collateral, known as an inherent risk of margin trading. Therefore, you should prepare yourself for this challenge in advance. 

Margin Trading for a Day

Margin trading means trading in stocks where you must pay a certain percentage of trade value without making full payment. You will have to approach an authorized stockbroking firm to open a Trading account. 

You just have to make a minimum margin payment, and you can leverage your trade position with this minimum margin. Make sure to close all your trades by the trading session’s end. 

Margin Trading for Longer 

You need to maintain a minimum margin for a buy position to get carried forward for an extended time. A part of the total investment amount is required to receive the remaining amount. It is possible to repay the margin amount within a particular period and make the payment. 

With margin trading, you can improve your investment capacity. You can invest a small amount in taking more significant positions in margin trading. 

Eligibility for Margin Trading

  • There is a need to open a margin account to get the margin trading facility (MTF).
  • The margin differs from one broker to another.
  • Make sure to have a certain sum while opening the MTF account.
  • Maintaining a minimum balance is a must. There is a chance of your trades getting squared off when you cannot maintain the minimum amount of balance.
  • The position should be closed at each trade session’s end.

Benefits Of Margin Trading?

While it comes with increased risk, margin trading offers several potential benefits for traders and investors. Here are some key advantages of margin trading:

1. Greater purchasing power

You can raise your buying power and leverage your money through margin trading. You can take control of a bigger portion of the market with a lesser starting expenditure.

2. Opportunities for short selling

You can take advantage of short-selling possibilities by using margin trading. You can take advantage of a sinking market by selling borrowed securities in advance of their price decreasing.

3. Adaptability of trading tactics

Executing various trading methods is flexible in margin trading. Margin trading enables you to use a variety of techniques depending on your perspective for the market, whether you want to go long or short on stocks.

4. Portfolio diversity

Margin trading allows you to more effectively diversify your portfolio by making investments in a larger variety of assets. This can diversify your risk and possibly boost the performance of your entire portfolio.

5. Quick financial access

You can easily acquire additional funds through margin trading without having to sell your current investments. When you require quick cash for emergencies or investing opportunities, this can be advantageous.

6. Potential for generating income

Margin trading might present a chance to make money by charging interest on borrowed money. You can benefit financially from the margin trading facility if you keep the spread between your investment returns and the cost of interest positive.

It’s important to understand that trading on margin has a higher risk because there is a chance of bigger losses. Maintaining proper risk management, trading responsibly, and having a thorough understanding of the risks involved are essential.

Conclusion

Traders and investors can find this margin trading significant activity in the stock market. Therefore, you can take a more prominent position with a minimum amount in margin trading.

Frequently Asked Questions (FAQs)

Understanding margin trading features will help you perform margin trading effectively.

You can easily access a margin account only when you meet minimum requirements. Therefore, it is the minimum margin. According to the Financial Industry Regulatory Authority (FINRA), the minimum baseline margin is $2,000.

Margin rate means the interest rate on your margin loan that you will have to pay to your stockbroker.

No. The interest rate will be different based on the size of the margin loan you apply for.

When you fail to meet a margin call, it will turn into an unsecured debt by default. Following are the reasons why you fail to do it-

You need to have a margin account for margin trading. This account is different from a cash account, an account in which transactions happen in money. A margin account helps you hold all securities as collateral against a margin loan. When you can’t meet a margin call, there is a chance of getting some or all of your investments sold to restore the required equity ratio.

Here are the following different risks in margin trading.

It depends on your investment goals and risk tolerance. Common stock has the potential for higher returns, but it is also more risky. Preferred stock is less risky, but it does not have the same potential for growth.

It depends on your individual circumstances. Preferred stock offers some advantages over common stock, such as guaranteed dividends and priority in the event of a liquidation. However, it also has some disadvantages, such as no voting rights and limited growth potential.

Yes, you can have both common and preferred stock in the same company. This is called a dual-class stock structure. Dual-class stock structures are often used by companies that want to give founders or early investors more control over the company.