Understanding Margin Trading: Risks and Benefits

Margin Trading Funding (MTF) gives you the power to buy more financial securities than you can afford at any one time. Margin of negociation is a leverage strategy to increase buying potential in financial markets. Through MTF, you can buy shares for a larger amount by just paying the margin and the rest will be funded by the stockbroker. The broker lends you the funds needed to purchase securities and keeps some of your shares as collateral. The earnings from these stocks will be entirely yours, even if purchased through the margin account. The stockbroker will charge you interest for the number of days the position is held.

Advantages of Margin Trading

Among the various advantages of margin trading, the main advantages are listed below:

  • Easy to activate
    Margin trade financing is one of the best ways to get funds for stock trading provided you maintain a minimum margin balance in your account. To activate and make the most of this facility, one must duly sign and send the power of attorney document (POA) to his stockbroker. Once received, your margin account and MTF setup will be activated.
  • Tap on trading opportunities
    Margin trading allows you to take advantage of short-term price fluctuations even if you don’t have enough funds at the time.
  • Best rate of return
    Margin trade financing can potentially amplify your returns and improve your rate of return on invested funds, provided you are involved in a well-analyzed trade following market direction and trends. Your margin trade profit will be impacted by the brokerage cost and interest on the margin trade finance amount. The lower your brokerage fees and interest on the margin trade funding amount, the better your return on investment will be.

    Bajaj Financial Securities Ltd., with an ever-growing customer base, offers you Bajaj Privilege Club Membership which charges one of the lowest interest rates on brokerage and MTFs in the industry. Bajaj Privilege Club members enjoy equity delivery, intraday trading and F&O with 75% lower brokerage, charging only Rs.5 per order (whereas most competitors charge Rs.20 per order), which helps them save significantly on trading costs. They can also avail of the Margin Trade Finance Facility (MTF) for just 8.5% per annum, which is again one of the lowest interest rates in the industry.

  • Low interest rates
    Margin trade financing is a convenient line of credit that can help you seize market opportunities. However, you may need to look for a stock broker offering lower interest rates. Your search may end with Bajaj Privilege Club, offering one of the lowest interest rates in the industry at 8.5% per annum. You only have to pay Rs.23.28 per day for 1 lakh MTF.
  • Monitored by capital market supervisor SEBI
    SEBI monitors margin trading activities very closely. He is constantly working to safeguard the interest of investors. Therefore, your funds and securities are safe and secure.
  • Longer term to hold a position
    When you buy stocks under MTF, you get a decent amount of time to hold the position. This way you have a wider time frame to monitor the price and exit the position on a favorable opportunity based on market trends.

    With Bajaj Financial Securities Ltd., an MTF position can be maintained for up to 365 days.

Margin Trading Risks

An investor or trader should be aware that with margin trading there is attractive profit potential with easy access to necessary funds, but it also comes with some risk. Here are the risks to understand before taking on a margin account:

  • Risk of amplified effect of losses
    In the margin trading facility, you use funds borrowed from the stockbroker available at a low interest rate. Therefore, your financial obligations are much higher than regular exchanges. If your trade goes against you, it amplifies the effect of the loss.
  • Unmanageable refund risk
    Margin interest is accrued daily and charged monthly. You have to regularly pay interest on borrowed funds; otherwise, it can grow to unmanageable levels and you will be penalized for unpaid interest. Hence, it is recommended to compare the interest rates of different stockbrokers and avail the facility at a lower interest rate only, as this would help you save the extra charges incurred.
  • Risk of not being able to respond to a margin call
    To benefit from MTF, you must maintain the margin amount in your Demat and Trading account. This is a specific percentage of your trade value that must be kept in your account, depending on the broker and the type of securities you are trading. It can increase or decrease with the number of securities and market conditions.

    If the value of securities secured under MTF falls below the minimum margin requirement, your broker may issue a margin call. You will need to add money or liquidate your positions for minimum balance maintenance. If you don’t react quickly, your stockbroker may sell securities.

So, you can take advantage of Margin Trading Facility with a SEBI-registered stockbroker and take conservative positions to make big profits in the market. Check margin trading prerequisites, leverage offered, and interest rates with your broker before engaging in margin trading.

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