Margin Trading Overview
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In the world of trading, Margin Trading finds a unique place. So what is Margin Trading? It is a form of trading, where you borrow money or is provided to by a third party, let’s say, a broker, for trading assets.
It can also be defined as the difference that will arise when we subtract the total value of securities found in the account of the investor from the loan amount provided by the brokerage firm or the broker.
In layman’s term, it is akin to borrowing money and then buying securities. In this scenario, then the broker will become the lender and the trading asset or the securities which are present in the investor’s account will act as the collateral.
Mathematically, Margin Trading can also be defined as the ratio between profit and revenue.
It is also imperative to remember that to trade on a Margin, one needs to have a Margin account. A simple Brokerage account will not work. So your question would now be what is a Margin Account?
A Margin Account, which is one of the important cogs in the wheel for Margin Trading, is a Brokerage Account, in which the investor is lent money by the brokerage firm or the broker.
This money is then used to buy securities which otherwise the investor wouldn’t have been able to.
The leverage that is borne by the margin will amplify both profit and loss. However, in the event of a loss, the brokerage or the broker can go ahead and liquidate the securities, without consent, during a margin call.
Margin Trading Facility or MTF can be quite a useful tool for investors while dealing with Margin Trading.
This is a facility that is given to an investor who then uses it to buy shares and securities by paying a small part of the total value of the transaction.
Till 2018, SEBI allowed MTF against cash margin but not against shares. That limitation has since been relaxed. Investors can now use shares as collateral while creating a position under MTF.
SEBI and the Stock Exchanges monitor the securities which are under Margin Trading Facility and they prescribe the margin needed on cash or shares as collateral, from time to time.
Why choose Margin Trading?
There are myriad benefits to choose Margin Trading over the other forms of trading:
- This is a form of trading that allows you to borrow money from a broker to buy securities. Hence, with this extra cash, you can take advantage of the fluctuations in the price in the short term.
- The security which you have in the Demat account or in your portfolio can be used as the collateral.
- The Margin Trading Facility helps improve the rate of return in relation to the capital invested.
- The purchasing power of the investor is increased manifold.
- The entire transaction happens under the strict supervision of SEBI and the Stock Exchanges. They monitor every transaction minutely to detect wrongdoings or unfair trade play.
However, it is also important to know the inherent risks which are involved in Margin Trading.
- If the idea to trade on margins was to amplify the profit, please remember that the losses to get amplified. There are instances when investors have lost more than what they had invested. Also, the myth of brokers being less strict than banks gets broken when the losses keep mounting since the contract with a brokerage firm or a broker is as binding as the one you might have with the bank.
- Liquidation can happen if you fail to answer a margin call. The broker can sell a part of the entire asset under these circumstances, without your consent.
- A minimum balance needs to be maintained at all times. If it is not, then the broker might ask you to. If you still do not pay heed to it, the broker can go ahead and sell a part or all your assets to maintain the minimum balance.
Investors still choose Margin Trading to amplify their profits. It is a risk most are willing to take.
Margin Trading platform
Let us look at some of the Margin Trading platforms, available in India:
1. Zerodha Margin Trading:
Zerodha does allow Margin Trading. They offer Margin Trading through three products: MIS, BO, and CO.
The leverage rates differ as per the types:
For MIS, the leverage ranges from 3 to 12.5 times. It primarily depends on the scrip.
However, MIS differs for Futures and Options:
- Index Futures and Options Writing: 35% of Normal Margin
- Stock Futures and Options Writing: 45% of Normal Margin
- Commodities and Currency Futures: 50% of Normal Margin
BO and CO offer greater leverage than MIS. The reason is because of the presence of the stop loss which minimizes the risk comparatively.
- Equity Derivative: CO/BO would be 2.45% of the contract value
- Index Derivatives: CO/BO would be 1.45% of the contract value
Point to note for anyone interested in Margin Trading in Zerodha:
- BO and CO aren’t allowed in the following types: Stock Options, Commodity Options, BSE Stocks and Currency Stocks
- You will not be allowed to use the product type MIS in currency options
- Similarly, you won’t be able to use BO in MCX
2. ICICI Margin Trading:
ICICI does allow its customers to trade in margins. It is for those who wish to take advantage of the upward and downward trend of prices of stocks during a trading day.
A simple ICICI Margin Trading example would be:
Suppose you intend to open a trade at INR 100,000 at a leverage of 10:1, all you would need to commit is INR 10,000.
A simpler margin trading example would be: You intend to buy 100 shares of Company A at the Current Market Price of INR 500. The total value of this entire transaction is INR 100*500 = INR 50000.
Now since you are Margin Trading, you are required to pay only the Margin %. Let’s say, 10%. Hence, all you would need to pay is 10% of INR 50000, ie. INR 5000.
To make trading simpler and decision making, even more, ICICI comes out with an ICICIdirect margin trading stocks list.
This will give you an idea of all the stocks you can do margin trading with.
3. Fortune Trading Corporation:
The Fortune Trading Margin Corporation also offer margin trading for its investors. But if someone intends to dive deep into the trends and analyze the stocks and their outcomes, the fortune trading margin calculator is quite a handy tool.
The above snapshot is the Margin that Fortune provides for all segments. An investor armed with such a piece of useful information will be able to make better decisions.
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4. Kotak Securities Margin Trading :
Kotak Securities is another company that allows Margin Trading for its investors.
It is pertinent to know that while margin trading in Kotak Securities through the Margin Trading Facility (MTF), you would be encountering varied margins for different stocks.
Also, it is only available under the cash segment for selected stocks. A minimum balance, as is the norm, has to be maintained. This minimum balance will be decided at the time of opening the Margin Trading facility.
If you wish to exit your position by either selling it off or by paying off the total debt amount.
It should also need to be remembered that if a Margin Trading facility is not being used for a period of 90 days continuously, it will immediately be settled thereafter.
5. Sharekhan Margin Trading:
Sharekhan is one of the major brokerages of the country.
It allows Margin Trading too among other services. However, Sharekhan margin trading charges differ as per the stocks. On average, Sharekhan provides up 32 times on MIS or on the stock during intraday trading.
It also charges a brokerage of 0.10% of the entire traded value.
Main Benefits of Margin Trading
It is beneficial for investors to understand the main features of Margin Trading before putting in their investments:
- Brokers who are authorized by SEBI can offer margin trading accounts. These accounts are maintained as per the rules set by SEBI.
- Investors will be able to build positions against the margin through cash or shares as collateral.
- The first step towards Margin Trading is to create a Margin Trading Facility. The MTF will follow all the rules and regulations set by SEBI. Also the investor, before opening an MTF account, needs to be aware of the risks involved.
- One cannot margin trade on all securities. Only those which are specified by SEBI and the stock exchanges are allowed to be margin traded upon.
How to perform Margin Trading?
The process is pretty straightforward. You approach the broker or the brokerage firm, where you intend to open an account. Ask for the opening of a Margin Trading Facility.
Look for the margins being provided by the broker. It varies from broker to broker. A minimum balance has to be provided at the time of opening of the MTF.
This minimum balance has to be maintained throughout the existence of the account. Start leveraging.
Also, important to inculcate some good practices:
- Play for a short time because that is what Margin trading is all about. It is a loan or at least similar to it. Treat it like one. Settle it at the earliest instance so that higher interests do not get added to it.
- Always, invest wisely. This is a maxim that needs to be followed to the hilt. You cannot be recklessly throwing money at every stock. Margin trading, in spite of its amplified profits also has a downturn. It is a high-risk game and hence one has to be cautious at all times.
- Never ever borrow the entire amount available, Leave some air. Test the waters first. Always keep a gap between the amount up for grabs and what you actually grab.
- Meeting the margin call is of utmost importance. If you are margin trading and you fail the commitment, it is not going to be a happy ride.
Also, understand the difference between Delivery trading and Margin Trading. It is key to your success.
- The first and foremost difference is that you receive the shares in a Demat account, in Delivery trading. For margin trading, it is a margin trading account or the Margin trading facility.
- For margin trading, a trader has to square off his or her position before the session ends. There is no such compulsion for the ones indulging in Delivery trading.
Margin trading is a great way to increase profits. If traded judiciously, margin trading can lead to portfolio diversification too.
However, something that gives you great profit will also have greater risks. Margin Trading does have its shortcomings, but then every form of trading does. Just be wise and careful, and the trading session will never let you down.
Q1. Who can avail of the Margin Trading facility?
Any trader who is active and has an existing account for trading in the BSE or NSE can avail of the MTF.
Q2. What is the minimum amount required to maintain the Margin Trading Facility?
It differs from brokerage to brokerage.
Q3. Is it important to maintain a minimum amount in the MTF?
Yes. Extremely important.
Q4. Can I margin trade in all stocks?
No, you are not allowed to margin trade in all stocks. Only the stocks which have been specified by the SEBI are the ones eligible.
Q5. Is Margin Trading safe?
It is safe. SEBI and Stock Exchanges keep constant vigil and look out for any wrongdoing and unfair trade practices.
Q6. What will happen if my minimum amount falls in the MTF?
You will always have to maintain the minimum amount, failing which the broker can liquidate your assets either partly or wholly to maintain the minimum amount.
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Stockquantum was founded by Dharmendra Mukati in 2018. I am a Trader and Investor in the last 10 years.
I am writing here about stock broker review, broker comparison, IPO investment, Crypto currencies, technical analysis, fundamental analysis, sub brokership, mutual fund, personal finance, and our experiences.