Margin trading books of brokers zoom amid bull run

Margin trading books of brokers zoom amid bull run

Sub : Eco

Sec: Capital Market

What is margin trader?

Margin trading, a stock market feature, allows investors to purchase more stocks than they can afford. Investors can earn high returns by buying stocks at the marginal price instead of their market price. Your stockbroker will lend you money to buy the stocks, and like any other loan, will charge an interest rate. As an investor, you will have access to larger amounts than the existing funds you possess. Thus, you can leverage your position in the market via securities or cash that allows more significant exposure to the market. Margin trading, sometimes also referred to as leverage trading, has its own set of risks, but it will yield higher returns if you can speculate the market movement correctly.

What are the features of margin trading in India?

• Investors can leverage their position in the stock market against the margin requirement by providing cash or securities as collateral.
• Securities traded through an MTF account are pre-defined by SEBI and the stock exchange.
• Only SEBI authorised brokers are allowed to open an MTF account for investors.
• When market conditions appreciate, the margin from your collateral stock will also increase, thus helping you buy more securities under MTF.
• You can carry forward your positions up to T+ N days, where T is the trading day, and N is the number of days that position can be carried forward. N is determined by individual brokers and will vary for different brokers.

What are the benefits of margin trading?​​​​

• Investors who want to increase their position in the market but hold inadequate investment capital can use margin trading. It is an ideal facility to make high profits in a short period.
• When you buy more extensive stocks with a small amount, it amplifies your leverage in the Indian stock market. With increased leverage trading, you can benefit from small market fluctuations.
• When the market is performing well, the margin-traded shares will reap higher returns than the commonly traded shares. That way, you can maximise the returns on your investment.
• Some form of collateral is required for the broker to lend you funds in MTF, for which you can put up your existing shares in your Demat Account as your collateral.

What are some of the margin trade practices to remember?

• Margin trading requires you to be always cautious. If you get high returns, you also can incur high losses. You should not falter at the risks of margin trading and be able to meet margin calls.
• Avoid borrowing the maximum amount from your MTF account. Once you develop an optimistic approach towards the stock market, you can confidently trade marginally.
• The margin amount is the loan that the broker provides; therefore, the loan amount is subject to a compounding interest rate.