Margin trade is the best option for those who want to trade in stocks that are out of their budget. Mostly, traders and investors use margin facilities to trade in the derivatives segment. The capital required to trade in the futures segment is way higher than in the cash segment therefore, in that case, taking margin from the broker might be the best solution.
Margin trading is nothing but borrowing funds from the broker to buy stocks that are out of budget. Traders and investors have to deposit a minimum amount in their Margin Trading Facility (MTF) account. The broker then allows you to take a certain percentage as leverage on the amount deposited. Also, the leverage provided by the broker is backed by the holdings in the demat account.
Margin trading has the potential to convert the safest buy call to a risky option. As a retail investor, it gives you enough power to buy shares worth more than what you can afford. This is kind of risky because the loss on the amount borrowed also enhances. If the plan goes as per the strategy then you can earn hefty profits. If not, things will get rough for you and you might have to pay back a large sum of money to your broker.
You can buy several stocks that you can not afford otherwise. To apply for a margin facility on your demat account, you need to have a Margin Trading Facility (MTF) Account with your broker.
Features Of Margin Trade
- It allows investors to leverage their position, against existing funds and securities in the demat account.
- Not all brokers have the right to provide margin to their clients. Securities Exchange Board Of India (SEBI) authorizes brokers to provide margin calls to their clients.
- You can either pay your broker by cash, or by giving the right to sell securities that you hold in your demat account.
- You can avail margin facility by opening a demat account with the MTF facility.
- The pay-off period has to be decided between the broker and the trader. Generally, it is N+T days.
Benefits Of Margin Trade
- It enhances trader’s profits, which take high risks while trading in the stock markets.
- While using the margin facility, you have the option to either pay off the amount by cash. And you can also settle by handing over your financial securities to the broker.
- It maximizes the return on investment for a trader/investor.
- The margin trading facility provided by brokers boosts the confidence of the trader as it allows them to buy more than that they could afford otherwise.
Convenience Of Margin Trading
- Short Term Profit Generation: For intraday traders and positional traders margin trading is the best option as it helps them in making a short-term profit.
- Collateral Availability: If you already have certain holdings in the demat account. You can use those holdings as mortgage and borrow funds based on the market value of your holdings.
- Maximize Returns: Where purchasing power increases the profit margin also increases because the quantity of shares increases. This is one of the biggest advantages of margin trading.
- Purchasing Power: It increases the purchasing power of the trader and which in return increases the trader’s profit margin.
Margin trading helps traders and investors with increased buying power. With high buying and trading power, there come a lot of risks. Therefore, traders should watch out for all of their margin calls. Never trade a naked margin call; it has the potential to put you at high risk.