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Features & Benefits of Margin Trading
What is Margin Trading?
Margin Trading Facility (MTF) is an investment facility that enables investors to buy shares by paying a fraction of the total value upfront. This fractional value is called margin, which is provided against clear credit balance in the investor’s trading account. The remaining funding is provided by the broker, for which they charge interest depending on the tenure of the borrowing. MTF is also known as eMargin. It helps investors take bigger positions by getting extra funding from brokers.
To understand how MTF works, let us consider an example. Say you want to buy shares worth ₹30 lakhs, but you only have ₹6 lakhs in your trading account. Normally, you will not be able to take this position. But with MTF, your broker will give you a loan of ₹24 lakhs, helping you place the trade. In exchange for this loan or funding, your broker will charge you interest for as long as you hold your position. The interest charged varies from broker to broker and can go as high as 24% p.a. In the above example, let us assume you use m.Stock’s MTF (eMargin) where the interest charged on borrowing of ₹24 lakhs is 9.99% p.a. Assuming you hold your position for 1 year, the total interest charged on this trade will be ₹2,39,760 (₹24,00,000*9.99%). This is how MTF works. Let us now look at the features of MTF.
Features of margin trading facility
- With MTF, your broker is only lending you the funds to buy stocks. You do not own the stocks as they are pledged with the broker.
- MTF is a leveraged product where you are buying shares beyond your purchasing power. This means both your profits and losses are multiplied (due to leverage).
- MTF is mostly used in delivery trades. The logic being that in the case of F&O, you are always concerned about expiry and settlement. But MTF allows you to hold your position in cash, without any holding period restrictions.
- Since it is a leveraged product, MTF is offered in select stocks only. The Securities and Exchange Board of India (SEBI) identifies the securities where MTF is allowed.
Benefits of Margin Trading Facility
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Eliminates the issue of inadequate capital:
Lack of capital is a common complaint among investors who want to seize market opportunities. But with MTF, you can undertake a large position by paying only a fraction of the trade value upfront. As we saw in the earlier example, you can take a position of ₹30 lakhs against a margin of ₹6 lakhs in your trading account. However, a majority of brokers cap the funding percentage to 50-70%. But with m.Stock, you get as high as 80% funding at one of the lowest interest rates starting at 6.99% p.a. -
Higher profit potential:
MTF is essentially a leveraged product. This means you can multiply your gains without actually paying 100% of the trade value. For instance, assume you want to place a trade for ₹30 lakhs (buy 2,000 quantities of XYZ Ltd. for a share price of ₹1,500). You will need to maintain a margin of ₹6 lakhs against broker’s 80% funding of ₹24 lakhs. Now assuming the stock moves up by 20%, your profit is a whopping ₹6 lakhs. But if you had not taken the funding, then you would have bought only 400 shares and your profit would be limited to ₹1.20 lakhs.
With MTF Without MTF Self-funding (margin) ₹6,00,000 ₹6,00,000 m.Stock funding ₹24,00,000 ₹0 Total trade value ₹30,00,000 ₹6,00,000 CMP per share ₹1,500 ₹1,500 Quantity bought 2000 400 CMP after 20% gain ₹1,800 ₹1,800 Total sale proceeds ₹36,00,000 ₹7,20,000 Profit earned ₹6,00,000 ₹1,20,000
In the above example, you have essentially multiplied your profits 5 times from ₹1.20 lakhs to ₹6 lakhs.This is how MTF helps investors leverage their capital and create potentially unlimited wealth. Use m.Stock’s MTF calculator to calculate how m.Stock's lowest interest rates can benefit your trades. Amongst a lot of players in the market, m.Stock’s eMargin is one of the best as interest charged starts as low as 6.99% p.a. for funding above ₹5 crore. And that’s not all. You can avail m.Stock’s eMargin facility without any subscription charges or brokerages. So, go ahead, invest big with m.Stock’s eMargin in 700+ stocks without paying a single rupee in brokerages. Open a m.Stock account today.
Risks in MTF
- Increased losses: Margin trading can increase potential profits, but it also increases losses. If your investments decline in value, you could lose more than just using your own capital.
- Margin Call and Liquidation: If your investments are not performing well, there will be a margin call. The broker issues this call when the balance in your account falls below the required settlement level, potentially resulting in the asset being liquidated to cover debt.
- Market volatility: Margin trading increases the sensitivity to market volatility is a great deal. Using borrowed funds increases the potential for gains and losses, making your portfolio more vulnerable to sudden price fluctuations.
- Interest Rates: Lending money for margin trading comes with interest expense, which can reduce profits or increase losses.
Read Also: Top Tips For Successful Margin Trading
Read Also: What is the Rate of Interest Charged on Margin Trading Facility?
