Suppose you want to buy a stock, but you find that you don’t have the required capital at the time of trade. What will you do now? Either you will not buy or fund your account with extra capital. That’s right, but margin trading is another way to buy shares. You might be thinking what margin trading is. 

In this guide we have made it easy for you to understand what is magrin money concept, what is margin in page, how much margin is needed for nq, and why my fund is kept as a margin obligation. So, let’s get started.

What is Margin Trading in Stock Market

Margin trading facility (MTF) allows investors to buy additional shares despite not having the funds to do so. In this case, the broker lends the funds to you as a trading margin to purchase stocks at a specific rate of interest, which encourages you to buy more shares on an MTF app.

In simple terms, money is a process in which traders buy funds from brokers and, in consideration, pay them interest for using the funds for the period they are used. It’s a trendy and rapidly growing market.

But buying stocks on margin takes more work. You need to pay a part of the total trade value to avail of the facility; the broker funds the rest. Plus, not all shares are tradeable on the margin trading app.  Only those shares approved by SEBI and exchanges can be traded in margin trading India.

Intraday traders widely use margin trade. Using this facility, they aim to profit by taking high leverage on margin trading app. However, this comes with a caveat: unresponsible use of MTF can also lead to high losses.

Benefits of Margin Trading

1. Increased Buying Power: The most significant advantage of market margin is that it increases your purchase capacity. It is like a leverage or debt that you take from your broker. High leverage will increase your purchase power and vice versa.
2. Higher Return: By buying stock margins, you can earn more returns even with small movements in stock prices. For example, if you take 2x leverage on your capital, then ₹ 20,000, your market exposure. Gets 40,000. High risk can result in high profit.
3. Trading Flexibility: The margin trading app allows traders to trade various asset classes, including invest in futures and options, currencies, and commodities. This allows the merchant to trade multiple assets, using leverage and profit from various market opportunities.
4. Short—and medium-term opportunities: Leverage in Intraday gives high-margin funding to traders on the margin trading app, allowing them to generate returns in short-term trading. They can even hold shares for a medium term of up to 275 days. After that, the margin has to be paid back.

Risks of Margin Trading

1. Higher Losses: As we all know, leverage is a double-edged sword. While it can increase profits, it can also increase losses. This makes margin funding hazardous, so strict risk management is necessary while using leverage.
2. Margin Calls: Margin is highly beneficial in a bull market. However, in a bear market, using it can prove destructive because whenever the stock’s value goes below the range set by the broker, it triggers a margin call. 

In this case, you must liquidate your stocks to fund your margin trading app or deposit the shortfall to meet the obligation. If you don’t, the broker will sell your shares.

1. Interest Costs: The broker lent these funds at a specific interest rate. HDFC Sky charges the lowest interest rate of 12% on the margin statement. Therefore, you must generate more than 12% return to be net profitable. Always consider this cost when asking for margin requirements.
2. Higher risk: Trading on margin during volatile market times can be risky. Even small price swings can lead to big losses, and a sudden drop in stock prices might force you to cover your position and trigger a margin call on the margin trading app.

Difference Between Margin and Delivery Trading

In delivery trading, traders must have the capital to buy the shares. That means you can’t buy shares without a positive trading balance. On the other hand, in margin trading, you borrow capital from your broker at a specific interest rate. In margin trading, you can hold the shares for 275 days maximum on the HDFC Sky app, while in delivery, you can hold indefinitely.

What is Futures and Options

Futures and options are derivative instruments whose value depends on the underlying asset, group of assets, or benchmark. Traders use these instruments to trade futures and options and hedge their portfolios. 

Futures contracts are legally binding agreements to buy or sell a particular security, including a stock or commodity, at a predetermined price on a future date. On the other hand, options contracts give the buyer the right, but not the obligation, to buy or sell such an asset at a predetermined price within a specified time frame.

One advantage of futures and options over stock trading is that they offer much higher leverage to traders. Futures and options require higher capital as they are traded in lot sizes. These trades are speculative and come with high risk.

Steps to Start Trading on Margin

1. Open a margin account: Choose a broker with a reliable margin trading facility. You’ll need to set up a Demat account before you can begin trading on margin.
2. Know your margin Statements: Your margin statement will show how much of your funds are being used as collateral and what’s still available for trading. Knowing this helps you make informed decisions.
3. Use a margin trading app: To monitor your trades wherever you are, consider using a mobile trading app. This makes it easier to track your positions, balance, and margin usage on the go.
4. Fund your account or use collateral: You can deposit cash or pledge your existing securities as collateral. This provides you with the leverage needed to start trading on margin.
5. Keep track of your Trades: Trading on margin means you’re borrowing funds, so monitoring your trades is vital. Even small price movements can lead to more significant swings in profit or loss, so staying alert and ready to act is critical.

Conclusion

Margin trading is a powerful way to boost your investment return by borrowing funds from your borrower. These funds come with a specific interest rate, which you must pay for their use period. Just think of it as a bank loan. 

Margin trading facilities are a double-edged sword. If not used prudently, they can lead to huge losses. In a bear market, using margins to invest can lead to a margin call and liquidation of holdings if funds are not deposited on time. It has a high interest rate of 12% per annum, and you must generate more return than 12% to become net profitable on your margin portfolio. If not, it will result in a net loss, even if you remain profitable. 

However, if used optimally in a bull market, they can significantly boost the overall return. Traders can borrow more shares using the MTF app on margin. It also allows traders to trade many securities, including futures and options requiring high capital. 

If you have yet to start investing, consider opening Demat account first and start trading.