Margin trading is a financing facility that enables you to purchase stocks by paying a certain percentage of the total value of the stocks. The fractional amount of money that you pay is called margin money. You can pay the margin money either in cash or shares as collateral.
For example, if you want to buy a thousand shares of TCS, you will require more than thirty-two lakhs to make a delivery-based purchase.
Even If you don’t have that much money but still want to take a wager on a thousand shares of TCS stock, then margin funding comes to your aid. New-age online trading platform has significantly improved the efficiency of margin trading.
Margin trading enables you to use leverage to increase your buying power, while the primary objective of options trading is hedging.
Types of Margin Trading
Margin trading for intraday purposes
This is the most preferred margin trading by traders. Your broker typically provides you with a margin of up to five times your margin, which will vary depending on stock volatility.
You have to specify at the time of placing an order that your stock purchase is only for intraday, which means that these trades need to close before the end of trading on that particular day.
In India, the trading closes at 3.30 PM, and brokers usually check for open positions with their open position Management Information System 30 minutes before the close of trading hours.
When an investor doesn’t square off their position till the stipulated time specified by the broker, then the broker’s Risk Management System (RMS) closes the client trade to follow the regulations.
Margin trading for delivery purposes
In this case, you take delivery of shares purchased through margin funding and don’t have to square off the position at the end of a trading day. You pay a margin of 25% (specified by the broker) of the total value of the stocks.
The pay-in has to be done the next day by your broker. The broker pays through their NBFC (Non-Banking Financial Company) arm or alternate financing arrangement. You will be charged interest by your broker for the period for which you have availed the margin.
When you sell the shares, the system closes your margin funding position. You can use the online trading platform of your broker for both types of margin trading.
What You Should Know about Margin Trading in India
You can do margin trading only with Securities and Exchange Board of India (SEBI) recognized brokers with whom you need to have an MTF (margin trading facility) account. You can use cash or shares as collateral for margin money to take a position.
Margin trading allows you to leverage positions in securities that are not included in the derivatives segment. Securities and Exchange Board of India (SEBI) and its respective stock exchanges identify the securities that can be margin traded.
You should be diligent and follow prudent risk management practices to be successful in margin trading.
