You may often come across costly yet profitable shares. Usually, blue-chip stocks are expensive. But, as per your own analysis as well as that of experts, the concerned stock looks bullish. However, presently, you have insufficient balance in your bank accounts to fund the stock purchase. If you postpone your purchase, then you may have to buy the stock at a higher price or you may never be able to buy it. So, how do you solve this problem?
The apt solution for this problem is to opt for Margin Trade Financing (MTF) facility. Margin trading is a stock trading practice wherein you need to invest only a marginal portion of the total transaction value and the rest is funded by your broker. This margin amount can be paid in cash or by pledging the shares. You will gain if the stock price moves in your favor else you have to bear a loss.
Features of margin trading
Only authorized brokers can offer MTF facility:
You hold securities in your Demat account. These securities can be used as collateral for margin financing. Brokers are strictly not allowed to use the shares as collateral without the consent of the shareholder. Thus, the MTF facility is closely monitored by SEBI to prevent unethical practices. Hence, only authorized brokers can offer MTF facilities.
Margin positions can be carried forward to T+N days:
‘T’ stands for the day the position was opened using margin trading. ‘N’ refers to the total number of days within which the position needs to be squared off. So, you can carry forward margin positions for more than a day. Thus, it is useful to both intraday, swing, and delivery traders.
Margin trading not allowed for all stocks:
You cannot buy every stock trading on stock exchanges using the MTF facility. The broker will offer you the list of stocks on which MTF can be availed.
Investors need to open a separate MTF account:
You need to open an MTF account with your broker for margin trading. Your account will be operational as soon as you accept all the terms and conditions and pay up the margin money. Margin money is a certain amount you need to deposit with your broker to maintain minimum balance in the MTF account.
If you do not maintain the requisite balance, you must add the balance amount at the earliest. In case you are unable to replenish, your broker will square off your open positions.
Besides, before opening an MTF account you need to open Dematand trading account. In case you have any query regarding what is a trading account, visit any broker’s website for more information.
Benefits of margin trading
You can gain from stock price volatility:
You can engage in margin trades to benefit from stock price movements. Short-term price fluctuations create opportunities for making profits. You can encash on the same even if you do not have sufficient balance to purchase the stocks.
Margin trading enhances your purchasing power:
You no longer need to worry about owning expensive stocks. Margin trading allows you to borrow the requisite amount from the broker to buy stocks that you cannot afford. Moreover, many brokers these days charge nominal interest rates on the loan amount. Thus, you do not have to shed much from the gains you make.
Margin traders can increase your returns:
Your returns on invested capital increase significantly if your margin trades turn profitable. Investors often earn profits that may even be higher than the margin money they deposit with their respective brokers.
Above, you learned about the features and benefits of margin trading. Thus, margin trades help you leverage your position in the market. However, they may increase your losses and lead to the liquidation of your assets by the broker. But, irrespective of all the pitfalls, margin trades are advantageous if utilized with caution.