What is Margin Trading in Finance?
In the stock market, Margin trading is the process where individual investors buy more stocks than they can afford to. Margin trading is also an intraday trading practice and there are several stockbrokers out there who can provide this service. Margin Trading involves buying and selling of securities in one single session.
Key features of Margin Trading
● Margin trading allows investors to leverage their positions in securities that are not from the segment of derivatives.
● Only authorised brokers can offer margin trade accounts as per SEBI regulations.
● Securities that are traded on margins are pre-defined by SEBI and other respective stock exchanges.
● Investors can create positions against the margin in the form of cash or collateral through shares.
● The margin created positions can then be carried forward up to a maximum of N+T days where N is the number of days the said position can be carried over and T is the trading days.
Practices to follow
- Invest well: if you are planning to invest through margin trading, be cautious.
Margin trading, if done well, can magnify gains, however, vice versa also
- Borrowing lesser than the allowed limit: you should avoid borrowing the full
allowed limit. Give a try with a smaller amount first and see how it goes for
you. If you are confident about the process and your position, you can
continue margin trading
- Borrow for short durations: margin is like a loan, which you are liable to pay
interest. Hence it is advisable to settle the margin at the earliest so that
you don’t accumulate higher interest on margin trading.
Regulations by SEBI
The margin trading was only allowed with cash and providing shares as collateral was not allowed until last year. SEBI or the Securities and Exchange Board of India relaxed this condition by enabling investors to create positions under the margin trading by furnishing shares as security.
In order to be eligible for margin trading, you must have a margin account with the broker in order to avail of MTF or Margin Trading Facility. A certain sum of money is needed to be paid at the time of opening the MTF account. A minimum balance is needed to be maintained at all times, and on failing to do so, your trade will get squared-off. The squaring-off position is mandatory at the end of each trade session.
Benefits of Margin Trading
Some of the benefits of margin trading are listed below:
- The securities in your Demat account or portfolio can be used as collateral or security.
- Margin trading facility improves the rate of return on the capital you have invested
- Margin trading is suitable for those types of investors who are seeking to encash on the price fluctuations over a short period of time but do not have cash in hand.
- Stock exchange and the market watchdog, SEBI monitor the margin trading facility continuously.
- Margin trading facility also improves the purchasing power of investors.