1 April, 2025
Synopsis
Margin Trading lets you borrow funds from your broker to buy stocks beyond your capital.
To trade, you need a Margin Trading Facility (MTF) account.
While it boosts buying power, margin trading can also amplify losses.
Margin trading, a stock market feature, allows investors to purchase more stocks than they can afford. Investors can earn high returns by buying stocks at the marginal price instead of their market price. Your stockbroker will lend you money to buy the stocks and, like any other loan, will charge an interest rate. Keep reading on to know more about margin trading and how it works.
What is Margin Trading?
Margin Trading is a stock trading method that allows you to borrow money from your broker to buy stocks beyond your available capital.
As an investor, you will have access to larger amounts than the existing funds you possess. Thus, you can leverage your position in the market via securities or cash that allows more significant exposure to the market. Margin trading, sometimes also referred to as leverage trading, has its own set of risks, but it may yield higher returns if you can speculate the market movement correctly.
How Does Margin Trading Work?
Investors wishing to trade through margin trading must hold a margin trading facility (MTF) account. You can request your broker to open an MTF account. This is different from a Demat Account. The broker disburses funds in the account for you to trade marginally. SEBI pre-defines the securities that are allowed under an MTF account periodically. An MTF account enhances your buying power resulting in higher gains. Brokers will charge an interest rate on the loan amount, i.e., the money you put in for margin trading.
Example 1:
Let’s say you have ₹20,000 but want to purchase shares worth ₹50,000.
You can buy those shares through Margin Trading by simply paying a percentage of the total amount.
If an authorised broker sets 20% as the margin requirement, you will pay 20% of ₹50,000, and the balance amount will be lent to you by the broker.
20% of ₹50,000 is ₹10,000, and the broker will lend you the remaining ₹40,000 and charge interest on the margin amount.
Example 2:
Now, if you owned ₹50,000 and could easily buy shares worth ₹50,000.
Assume that the share price rises on the same day, and now your invested amount increases to ₹55,000. In this case, your return on investment would be 10%. In the case of market trading, however, where your investment amount was only ₹10,000, the returns you would get would be potentially higher than 10%.
Conversely, if the market falls, you would incur losses through margin trading than you would have through regular trading. Additionally, suppose you do not sell your shares before the specified time, the broker has the right to sell shares, usually referred to as squaring-off, and liquidate the assets to mend any potential losses.
Trading Through HDFC Securities
With a user-friendly platform, HDFC Securities enables investors to trade effortlessly. To place a trade:
Log into your trading account with your user ID and password.
Click on Buy/Sell and choose Exchange as NSE.
Select the company and set the Product as Margin.
Enter the order type, quantity, and price of the scrip.
Click ‘Know Your Margin’ to calculate margin requirements before placing the order.
Track your order status in the Order Book for real-time updates.
What are the Features of Margin Trading in India?
Investors can leverage their position in the stock market against the margin requirement by providing cash or securities as collateral.
Securities traded through an MTF account are pre-defined by SEBI and the stock exchange.
Only SEBI-authorised brokers are allowed to open an MTF account for investors.
When market conditions appreciate, the margin from your collateral stock will also increase, thus helping you buy more securities under MTF.
You can carry forward your positions up to T+ N days, where T is the trading day, and N is the number of days that position can be carried forward. N is determined by individual brokers and will vary for different brokers.
What are the Benefits of Margin Trading?
Investors who want to increase their position in the market but hold inadequate investment capital can use margin trading. It is an ideal facility to make high profits in a short period.
When you buy more extensive stocks with a small amount, it amplifies your leverage in the Indian stock market. With increased leverage trading, you can benefit from small market fluctuations.
When the market is performing well, the margin-traded shares will reap higher returns than the commonly traded shares. That way, you can maximise the returns on your investment.
Some form of collateral is required for the broker to lend you funds in MTF, for which you can put up your existing shares in your Demat Account as your collateral.
How to Manage Risks in Margin Trading
Margin trading requires you to be always cautious. If you get high returns, you also can incur high losses. You should not falter at the risks of margin trading and be able to meet margin calls.
Avoid borrowing the maximum amount from your MTF account. Once you develop an optimistic approach towards the stock market, you can confidently trade marginally.
The margin amount is the loan that the broker provides; therefore, the loan amount is subject to a compounding interest rate.
Read more about margin calls here.
What Should You Know About SEBI Regulations?
Before, authorised brokers were allowed to accept only cash as collateral against the amount lent to the investors. However, as per the Security and Exchange Board of India (SEBI) guidelines, you can now provide shares as collateral.
Additionally, SEBI has also introduced the ‘Margin Pledge.’ The Margin Pledge is where brokers report any margin exchange between the broker and the investor four times a day. Brokers also follow other stringent norms so that SEBI can achieve the utmost transparency in Margin Trading.
SEBI has also iterated that those opening fresh Demat accounts and trading accounts will be given the facility of nomination or even opting out of the nomination. SEBI has also introduced a new framework to include a change in PAN, signature, contact and bank details; the issue of duplicate securities certificates; consolidation of securities certificates, etc.
Margin trading can significantly increase your buying power, but it can also result in amplified losses if the market turns its back on you. Thus, you must be extremely cautious when investing through margin trade.
Open a Demat Account + Trading Account at once with HDFC Securities. Know more here.
*Disclaimer: Terms and conditions apply. This is an information communication from HDFC bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
