What are the Features of Margin Trading?

One of the most important things to understand in margin trading is the special features of margin trading. Margin trading allows you to leverage your trading capital more effectively by taking some basic funding support from your broker. One of the major features of margin trading is that it ensures you don’t miss out on opportunities just because you are a tad short of cash. Another of the very important features of margin trading is that you only pay interest on MTF to the extent of debit in your margin trading account and hence it is almost like an efficient overdraft facility. Let us now focus on the special features of margin trading and also the benefits of margin trading.

Features of Margin Trading

Here are some of the key features of the margin trading facility to be availed by clients at the broking house.

• All the investors who are looking to avail of the margin trading facility are required to provide an undertaking by initialing their acceptance of all the Terms and Conditions applicable to the MTF, over and above the rules already applicable to the regular trading account. The margin trading facility is not a separate trading account but it is offered in the same existing trading account and linked Demat account.

• The MTF facility allows investors to create leveraged positions in securities, as a multiple of what they can afford based on cash on hand. This is especially relevant in the non-derivative segment where future leveraging is not possible.

• Traders who avail of the MTF facility can provide their margin amount either in cash or in securities collateral. However, the value of the equity collateral will only be considered after the normal haircut of 40% to 50% in the case of equities. Alternatively, trades can also offer the margin through a mix of cash and shares as collateral.

• There is no standard limit on the number of days the position can be carried forward and that is at the discretion of the broker and also customized based on the relationship that the broker and the client enjoy. Normally clients who give higher brokerage and have a long-standing relationship do get some special privileges. Normally, this extends for 2-3 months in the majority of the cases.

• Brokers cannot offer MTF facilities on all the stocks listed on the stock exchange. The master list is defined by SEBI which is the outer limit for offering the MTF facility to the clients. However, most brokers also impose their level of checks and balances and even prune this list further in the interest of safety and security.

• Currently, the SEBI rules only allow corporate brokers registered with SEBI to offer the margin trading facility. Individual brokers and brokerages structured as partnerships cannot offer this facility.

Why does margin trading matter?

Margin trading is all about getting financial leverage. It gives you the privilege of buying stocks even when you do not have enough funds available to you. Here is why a margin trading facility can be very significant for traders and investors.

• Margin trading allows traders and investors to take the full benefit of short-term trading opportunities without delivery of shares and even when they do not have the funds required to take full delivery.

• MTF is like leveraged trading and is very useful in stocks where futures are not available. You can buy or sell stocks by paying a fraction of the transaction value, and even that can be paid either in cash or in shares as collateral.

• Apart from the leverage factor, the most important reason why margin trading is significant is that it allows you to grab the ultra-short-term opportunity available in the markets, which you would have normally missed out on.

• It can help you to take positions beyond your basic affordability and that is very useful in high conviction calls. You often make a profit and regret you did not take a bigger position. MTF can help you take a bigger position.

Benefits of Margin Trading

Here are some of the key benefits of having a margin trading account. You must start by activating the margin trading facility first. Now, over to the benefits.

1. Margin trading is ideal for investors who are looking for the opportunity for short-term price movement but do not have sufficient cash balance. Here, margin trading can fill the gap and provide liquidity.

2. If shares are lying idle in your Demat account, a margin trading facility is a good way of utilizing and monetizing stocks available in your Demat account. These shares can be offered as collateral margins to take MTF positions in the equity market.

3. Margin Trading can help you to Improve the percentage return on the capital deployed, or in short, improve your ROE. When you are trading on margins, you only pay around 25% of the cost. So, if the price moves up 5%, it is a 20% ROE gain for you.

4. Many times, investors miss out on very lucrative buying opportunities just because they do not have the liquidity available with them. In such cases, the margin trading facility can help you to capitalize on these opportunities and enhance your corpus.

Even though you are borrowing, you are only using the loan to buy an appreciating asset like equity which creates wealth in the long run.

How to Start Margin Trading?

The margin trading facility requires you to activate the margin trading facility once at the beginning. You don’t need to do it each time. There are various ways of activating your margin trading as explained below.

• By sending an email from your registered email id with margin activation request and quoting other relevant client codes and Demat code.

• By sending a written signed letter to activate the margin trading facility

• The activate margin trading facility can be done even by making a phone call to your equity advisor from your registered mobile or landline number.

• Similarly, the margin trading facility can also be activated by just calling the call center, which is normally a toll-free number and authenticating yourself.

• Activation of margin trading facility can also be done by logging into your trading account using your internet password authentication and making a request

• Lastly, you can also use your downloaded trading app trading app and log in through your mobile to make the activate margin trading facility request.

You don’t need to open a new margin trading account. You can use your existing trading and linked Demat account to activate the margin trading facility. The activation is normally done within 24-48 hours and once that is done then the value of shares in the linked Demat account automatically become eligible as margin based on the previous day's closing value of the stocks. Any dividends received during this period will be automatically credited to your linked bank account.

Even though you have availed margin trading facility, the interest is only charged on the amount of debt that stands to your trading account. If the trading account is having a credit then there is no interest charged for the margin trading facility so it almost operates like an overdraft facility. The only requirement is to ensure that when you select the buy button, also select that it is a margin trading buy and then the rules of MTF are automatically applied to the trade. Brokers will insist on minimum maintenance margins at all times.