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What is the Margin Trading Facility?
Margin trading is an activity wherein you can buy more stocks and securities even with limited funds. Your stockbroker pays the additional funds needed for the purchase by charging an interest on them.
For instance, if you have stocks worth Rs.1000, with margin trading you can trade in stocks worth Rs.5000. The additional Rs.4000 would be offered by the stockbroker who would charge interest on the same.
Why choose Margin Trading Facility?
Higher purchasing power
Increase your trading volume by getting a higher balance in your trading account.
Diversification
You can access a diversified bouquet of stocks and diversify your portfolio without worrying about the investment required.
Affordable
The interest charged on the borrowed funds is low and affordable, making it easy for you to pay it off.
Potential returns
With an increased investment capacity, you can buy more stocks and benefit from short-term price movements.
Table of Contents
What is margin trading facility?
Stockbrokers offer a Margin Trading Facility wherein investors can leverage their capital to trade more. Investors can get additional funding from brokers to buy more shares. Brokers, in turn, charge an interest on the funds provided.
What are the features and benefits of Margin Trading Facility?
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Margin trading can be done with cash balance or by pledging existing shares
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Interest is charged on the funds provided by the broker
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There’s a maximum holding period for shares bought under margin trading
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You can buy equity shares from the NSE or the BSE
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Dividends are paid on open positions
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Sell your shares anytime to pay back the outstanding amount
How does the Margin Trading facility work?
You choose to leverage your existing cash balance with your broker or pledge your existing shares for availing of the margin trading facility
A maximum trading limit is allowed depending on your existing balance or value of the pledged shares
You can buy shares up to the specified margin amount
You can stay invested in the shares up to the specified holding period
The broker charges interest on the funds advanced
You can pay off the borrowed funds and exit margin trading
You can buy and sell shares to make a profit from short-term price movements
What is the meaning of the MTF pledge?
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MTF pledge is relevant when you pledge your existing stockholding profile for the margin.
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As you choose MTF pledge, you are required to select the stocks you want to pledge for the margin.
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You get a margin limit depending on the value of the shares pledged.
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You can trade within the margin limit.
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If there’s a margin shortfall, the pledged shares would be squared off to meet the shortfall.
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You can repay the borrowed amount to remove the pledge from the shares.
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An interest is charged for the funds advanced by the broker.
Things to know about Margin Trading Facility?
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Maintain the margin at all times. Shortfalls can hinder trading
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Margin trading is available only with a valid Demat and trading account
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Margin trading facility is applicable only for buying and selling equity shares
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Margin trading is regulated by SEBI and is a completely legal activity of trading in shares
What is a Margin Call?
A margin call takes place when the value of a margin account drops below the maintenance margin requirement. It constitutes a request from the brokerage firm for the investor to restore the margin account balance to meet the minimum maintenance margin requirement. To fulfill a margin call, the investor must either deposit additional funds, submit unmargined securities, or sell existing positions.
Whats are the risks involved in Margin Trading?
Magnified Losses
One of the primary risks in margin trading is the potential for magnified losses. Since margin trading involves borrowing funds to increase the size of positions, both gains and losses are amplified. If the market moves against the trader, losses can exceed the initial investment, leading to significant financial implications.
Minimum Balance Requirements
Margin accounts often have minimum balance requirements, which represent the minimum amount of capital that must be maintained in the account. Falling below this minimum balance can trigger a margin call, requiring the trader to deposit additional funds promptly. Failure to meet this requirement may result in forced liquidation of positions.
Liquidation Risk
Liquidation risk arises when the value of the margin account falls below a certain level, triggering a margin call. If the trader is unable to deposit additional funds to meet the call, the broker may liquidate (sell) some or all of the trader's positions to cover the losses and outstanding debt. This process can lead to losses and disrupt the trader's investment strategy.
SEBI regulations regarding Margin Trading?
SEBI has introduced fresh margin regulations aimed at enhancing transparency and protecting the interests of investors. The crucial aspects of these rules include:
| Before | Now | |
| Initial margin required in cash segment | No | On T Day, Minimum 20% margin required, for margin reporting. On T+1day. Additional margin (if applicable) to be paid within Pay in date (T+2Day) |
| Initial margin required for selling of shares | No | Minimum 20% initial margin required even while selling of shares. To avoid initial margin, Broker will do early pay-in. |
| Penalty on short margin | No | Yes |
| Pledging of shares | To pledge shares to obtain margin, the investor has to transfer the shares to the broker’s account or give Power of Attorney to Broker | The shares will remain in the investor’s Demat Account and limit on shares given as collateral will be available only on shares which are provided as margin through Margin Pledge Mechanism |
The revised regulations mandate the requirement for an upfront margin at the initiation of a trade
In the Equity Derivatives segment, clients are obligated to collect and report specific margins, encompassing initial margin, exposure margin/extreme loss margin, and mark-to-market settlements.
Customer Satisfaction Stories
Don’t just take our word for it. Hear from our customers about their successful financial journey with us
Account opening process is very simple and steps mentioned in the process are user friendly. Guidance wherever required is excellent and prompt.
Aditya Birla Money Customer
Panvel, India
My trading experience with ABM has been very fruitful. I have always been receiving excellent support from my dealer. Moreover, the transparent business practices at ABM makes it the preferred broker in the industry.
Aditya Birla Money Customer
Mumbai, India
Equity Funds for diversification
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Various equity funds -
Tax benefits on capital gains
Diversify with hybrid funds
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Various hybrid fund types
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Mix of equity, debt, gold
FAQs on Margin Trading Facility
Interest in margin trading funds is typically applied daily and is calculated as a percentage of the funded amount for the number of days you hold the position in MTF. The number of days is calculated from the exchange pay-in date for the transaction settlement and charged till the date of actual receipt of the funds. The MTF interest is charged per day basis including non-working days.
If you fail to meet the margin call, the broker may liquidate your securities as per the mutually agreed terms & conditions. The terms & conditions and “Rights and Obligations Document” will include the list of the conditions/situations in which the securities may be liquidated by the broker.
You need to maintain a minimum balance in your margin account as specified by your broker called the minimum margin. Before initiating a trade, you are required to deposit a percentage of the total value of the trade value and the remaining amount will be funded by your broker, on which it charges interest.
You can hold your margin trading funds positions as long as you maintain the required minimum margin in your margin account. Moreover, the holding period is determined by your broker. You can use your Exchange Traded Funds (ETFs) and shares instead of cash as collateral to create positions.
As per SEBI Regulation, only corporate brokers with a net worth of at least Rs.3.00 crores calculated as per the specified formula can offer margin trading facilities to investors. Partnership brokerages and Individual brokers cannot offer this facility.