Everyone loves to earn the maximum returns from Stock Markets however, lot of investors wish to leverage their capital and trade actively in the stock market and that is when Margin Trading Facility (MTF) comes into picture. While Margin Trading is not rocket science, it is vital to understand how it works and how you activate this facility. Let us walk through the basics of MTF to understand what is margin trading facility in market, its advantages, and learn the steps to activate it. Towards the end, we shall also discuss some interesting facts about Margin Trading in India after introducing MTF to you all.
What is Margin Trading?
Margin trading offers investors the facility to borrow money from a broker which is then used to purchase more securities than they could with their own capital. This gives them a chance to increase their potential to generate more profits however, it involves higher risk too. This facility is usually used by experienced investors to use leverage to maximise their trading potential.
How does this Margin Trading Facility (MTF) work?
Some key elements that we all need to understand are as follows:
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Margin Account: To activate MTF, you need to open a demat account with your broker. However, it is vital to note that this should be a margin trade account which is different from the regular cash account.
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Initial Margin requirement: Most brokers require a minimum amount i.e. your own funds to be deposited in the margin account. This percentage can differ from broker to broker.
For example, if you want to buy stocks amounting Rs. 2,000 and the initial margin requirement is 40%, you need to deposit Rs. 800 of your own funds.
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Borrowing Funds: Once your margin account is set up and funded as above, you can borrow money from the broker for additional trading.
When you borrow money to trade on margin, you’ll incur interest charges on the amount borrowed. This can vary by brokerage.
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Maintenance Margin: After the purchase is completed, you need to maintain a certain level of equity in your account, known as the maintenance margin. If there is a margin shortfall i.e. your account falls below this level due to losses, you may receive a margin call, requiring you to deposit more funds to ensure you meet the trading margin level.
If you receive a margin call and cannot meet it, your broker may liquidate your positions to cover the loan, often at unfavourable prices.
Benefits of Margin Trading
Some of the key benefits that the MTF offers us are:
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Higher purchasing power: Margin trading helps you in buying stocks more than you could with just your cash. This can lead to higher returns if your investments perform well.
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Short Selling: Margin accounts allow for short selling, which means you can profit from declines in stock prices. This facility is not available in a cash account.
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Flexibility: Margin trading provides the flexibility to act quickly in a fast-moving market since you need not run haphazard to look for more funds for investment.
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Portfolio Diversification: With increased buying power, you can diversify your investments across different assets without shelling out a lot of own funds.
How to Activate Margin Trading Facility
Now that you understand the basics of margin trading, let’s walk through the steps to activate the Margin Trading Facility.
Step 1 – Choose a Broker
The 1st step is selecting a broker that offers MTF. Since all brokers don’t provide this facility, it’s important to do your research beforehand. One must consider factors like margin rates, initial deposit deposit amount, track record and user experience of the platform while making a decision.
Step 2 – Complete the Application
Upon choosing the broker, you need to fill out the broker’s application form for a margin account. This typically includes your personal details, financial information, and investment experience. You shall be required to furnish documents such as ID Proof, Bank and Income details as well tax information.
Step 3 – Agreeing the terms and seeking approval
You’ll need to sign a margin agreement, which outlines the terms and conditions of margin trading with that brokerage.
Upon reviewing and accepting the terms and conditions of margin trading as outlined by your broker, you will be required to submit the application. Upon satisfaction and verification of the submitted details, the broker shall accord its approval.
Step 4 – Funding the Margin account
After your margin account is approved, you’ll need to deposit the required initial margin amount into your margin account. This can usually be done via bank transfer or wire transfer.
Step 5 – Understand margin requirements
You need to thoroughly understand your broker’s margin requirements before you start trading. To have a seamless trading experience, you need to understand the maintenance margin you must keep in your account to avoid margin calls later.
Step 6 – Start Trading
Once your account is funded and you understand the margin requirements well, you are good to go. You can start trading on the margin trading app and reap the benefits it offers.
Interesting Facts about Margin Trading
Most Stocks Bought in MTF
Investors commonly use MTF to trade high-volatility stocks that show potential for significant price movements. Stocks from sectors like technology, pharmaceuticals, and consumer goods tend to be popular choices. Such stocks are frequently traded under MTF due to their liquidity and growth prospects.
MTF List of Stocks: NSE and BSE
The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) maintain lists of stocks eligible for margin trading. Stocks that meet certain criteria, such as liquidity and market capitalization, are typically included in these lists. Investors can find updated lists on their MTF App.
Conclusion
Once you activate the Margin Trading Facility, it can open up new opportunities for you to maximise your earning potential in the stock market. With HDFC SKY, you can get on this journey of Margin Trading and multiply your income generating potential.
And ofcourse, if you manage to understand the risks involved and use it diligently, the rewards can be significant.
Hope the steps outlined in this guide help you in activating margin trading and to start exploring the benefits it offers. Always remember to trade responsibly and keep learning to make smart decisions.
