When you take a loan, you take leverage, which increases your purchasing power. You take a loan to enable yourself to buy something expensive that would not be possible without it. Similarly, a margin trading facility (MTF) is also leverage. It gives buyers leverage in the form of a loan to buy shares that would not be possible otherwise. Margin trade allows the borrower to purchase shares by paying only a fraction of the total purchase price, the balance being borne by the broker.

In this blog, we have covered every essential part of margin trading: what is margin, what is e-margin, what is MTF is margin, and about buying stocks margin, amongst others. So let’s get started.

What is a Margin Trading Facility

In margin trading, you borrow funds from your broker at a specific interest rate for a certain period. It increases the buying capacity of investors and traders. Using MTF on the margin trading app, traders buy more shares than they could with their capital. However, brokers usually don’t allow every share to be traded on a trading margin. Brokers maintain a list of highly liquid stocks authorised by stock exchanges and SEBI; only those stocks are tradeable on MTF App. 

However, there is a caveat with margin trading. Just like leverage, market margins are a double-edged sword. If you buy a stock on margin, assuming it will go up, it can lead to huge losses if it doesn’t. Sometimes, it can wipe out your entire capital in overleveraged conditions. That’s why a careful use of margin trading with an appropriate position size makes it an attractive option for traders to increase their overall return.M ake sure you open Demat Account before you buy stocks on margin.

How Does MTF in Stock Market Work?

Let us now understand how MTF in the stock market works with a simple example.

Suppose you want to buy 200 shares of a company whose share price is trading at ₹200 per share. Usually, a total of ₹40,000 has to be deposited with the broker. However, with a margin trading facility, assuming a 50% margin is allowed by the broker, you only have to pay ₹20,000. The broker app funds the remaining ₹20,000. These are not free; you must pay interest on these funds for the period you availed of the facility for the margin trading app.

Advantages of Margin Trading

• Enhanced Buying power: As explained earlier, it increases the buyer’s purchasing power. This allows them to purchase more shares and earn higher returns when the stock price rises.

• Adaptable: Margin trading app allow you to take more significant positions without paying the total amount upfront. This way, you do not lose opportunities due to unavailability of capital.

• Short-Term Gains: You can buy stocks on margin trading facilities and create an MTF portfolio. This allows you to make short-term profits without investing your capital.

Disadvantages of Margin Trading

• Margin Call: Suppose you buy a stock on margin, assuming you will profit if the price rises. However, what if, due to unforeseen circumstances, the price of the stock you bought on margin falls? In this case, your broker will ask you to deposit an additional margin to cover the shortfall. If you do not do so, the position will be liquidated to cover the margin call.

• Higher Interest Rates: It is just like a loan. The interest rates on the margin you take on margin trading apps range between 12% and 24% per annum, which makes it a bit expensive. However, if you are confident that you will get more returns than interest, this can be an easy way to get higher returns. HDFC Sky charges a minimum interest rate of 12%, making it optimal.

• High losses: Just as leverage can magnify your returns, it can also cause you to lose a lot if the trade doesn’t go as planned. To ensure that you don’t lose a lot in the greed for high returns, it is essential to use strict stop losses along with a prudent position size.

What is e margin

E-margin, or electronic margin trading, is a digital margin trading process using an online margin trading app. It is also called margin on loan. It enables investors to manage their margin accounts, view margin requirements, and trade electronically.

If a trader buys a stock for intraday on e-margin, the trade is usually liable to be squared off by the end of the trading hours. However, if you want to convert this intraday trade to delivery, you can pay intraday to carry forward charges.

Difference between MTF vs Intraday

The main difference between MTF and Intraday is that MTF allows you to hold the stock for T+275 days (i.e. 275 days), while Intraday trades must be squared off by the end of trading hours. Usually 30 minutes before trading hours. If you don’t do this, the system automatically squares off the Intraday position. In MTF, the position is sold only if you do not pay by T+275 days.

What is Margin Pledge

This is a relatively new concept in India. The broker in the stock market will only give you margin with security. So traders must pledge their existing shares as security to avail of the margin facility. This is what is margin against stocks. Also, if you bought any shares on margin, you must pledge that. Otherwise, they will be sold the very next day.

Now, a question often comes into traders’ minds: for how many days i can pledge shares? This depends on the broker to broker. Typically, you can pledge for 275 days in HDFC Sky; after that, you’ll have to repay your balance.

Conclusion

Margin trading has many advantages if used wisely. However, it also has some drawbacks, and if not used wisely, you can lose all your capital instantly. Also, if the market falls or the stock does not move as expected, you may get a margin call. Then, you will have to deposit an additional margin with the broker, failing which your stock will be liquidated.

You can increase your buying power and use it to make more short-term and medium-term profits. However, only if your returns are higher than the interest rate you pay will you make a return.