What are the Risks and Benefits Of Margin Trading?

Benefits Of Margin Trading

Marginal Trading

Marginal trading is the facility of investing in stocks more than the availability of funds with you. For a margin trade, your stockbroker will fund your trade and you can buy stocks by paying a marginal amount only of the actual trade value. Securities and Exchange Board of India (SEBI) permits you to pay a margin amount in cash or in the form of securities to your stockbroker. Margin trade meaning can be understood as the availability of loans for intraday traders to buy stocks. 

Margin Trading

The positions taken by a trader using margin can be carried forward for a maximum of N+T days. N denotes the number of days for which the position can be carried over and T denotes the trading days. The term and conditions may vary from broker to broker. 

  • You need to open a margin trading account to utilize a margin trading facility. 
  • SEBI permits only authorized brokers to provide a margin trading facility. 
  • Only predefined securities can be traded with the marginal trading facility at respective stock exchanges.
  • Marginal trading is not available for the segment of derivatives every time, generally, it depends on a broker to broker.

In marginal trading, you may make a profit or have to face a gigantic loss. Do not consider marginal trading as a supporter always. This leveraging position facility can be a transaction of losing your funds as well. Therefore, it is a highly regulated facility by SEBI and stock exchanges that is continuously monitored. Here are the benefits and risks of marginal trading online.

Risk Involved in Marginal Trading 

  1. Trading on margin is a facility where you borrow from your stockbroker. You are using money from someone else and increasing your financial leverage. Therefore, your obligations are much higher than trading with your own funds. Thus, in case your trade does not favor you, it amplifies the effect of losses for you. 
  1. When you as a marginal trader are unable to repay the borrowings to the stockbroker, your collateral securities are in danger. The broker may issue a margin call and you have to square off your position in a stock, no matter what is market condition and how much more losses you have to bear.  If you do not take any action to liquidate your positions, he is permitted to sell your stocks without getting an acknowledgment from you.
  1. You have to maintain a minimum balance in your margin trading always. You cannot make it lower than the minimum balance limit, otherwise, your trade gets squared off.

Benefits of Marginal Trading 

  1. Marginal trading increases the purchasing power of a trader. Because you can invest in stocks more than you otherwise could. 
  2. You can buy high-price fundamentally strong stocks through margin trading and earn a considerable profit. Thus, it improves the Return on Investment (ROI) on the capital invested.
  3. Securities in your online Demat account can be utilized as collateral against marginal trading.
  4. Margin trading is enormously beneficial for traders who want to encash the price fluctuations available for the short-term only but they do not have enough funds in hand.

Practices to Use MTF Wisely 

If you are going to use a marginal trading facility (MTF), keep these practices in practice to use the MTF wisely. 

  • As you know, MTF can magnify your profits and losses as well. You should choose MTF only and only if you are very sure about the success of your trade. 
  • It is suggested to use MTF, for a small trade value first and experience how it goes. 
  • Settle the borrowing money through MTF as soon as possible to avoid heavy interest.

Thus, make share trading beneficial for you using the marginal trading facility but cautiously. You need to open a Demat account to keep your securities electronically so that these can be used as collateral. To open Demat account, charges are nil with most brokerage funds and the rest depends on your requirements of trading facilities from a stockbroker.

Final word

Margin trading is an important factor for day traders to select the right brokerage firm for stock trading. Margin trading facility allows day traders to trade more than the available funds. You can check out the margin trade limits and the applicable terms and conditions with the stockbroker.

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