Margin trading is a facility offered by brokerage firms which allows you to purchase securities in the stock market even when you cannot afford them. You may consider margin trading if you expect to earn profits from trade but do not have enough funds to execute it. But how does this facility work? Do all online brokers in India provide this service? Let’s find out!
How Does Margin Trading Work?
Under margin trading, you only need to pay a certain percentage of the total transaction value, and the stockbroker would fund the balance amount. The percentage amount paid by you is called the margin amount. Thus, the name margin trading. The margin funding can be paid either as cash or in the form of shares as collateral.
It is a revolutionary feature of the online share trading process that gives traders a chance to boost their portfolio and get larger capital gains even when they do not have enough funds available at their disposal.
Benefits of Margin Trading
You can enjoy the following benefits with the Margin Trading Facility –
- Helps you buy a desired quantity of shares despite a low cash balance
- Makes use of securities sitting in the portfolio as collateral
- Improves the return percentage on the invested capital as you need to invest only a proportion of the transaction amount
- Enhances your purchasing power
- Lowers your portfolio risk as a lower amount is invested.
Who are Discount Brokers?
A discount broker in India refers to a brokerage firm or a stockbroker who offers all the essential trading services but at a reduced rate. They are different from the traditional or full-time brokers in the sense that they do not provide allied trading services like asset management, research, advisory, etc. Moreover, discount brokers are more focused on providing advanced technological solutions to provide their customers with various stock charts and other technical analysis tools.
Do Discount Brokers Provide Margin Trading Facility?
Yes, discount brokers do provide a margin trading facility. To get this facility, you must first submit a request to the discount broker to get your account Margin Trading Facility (MTF) activated. Once the activation is done, you will be required to deposit a minimum amount of money specified by the broker in your account at all times, which will be considered as the margin under the facility. Brokers keep this money as collateral, and then provide the required credit to you to buy or sell the desired financial securities.
Final Words
Margin Trading allows you to buy stocks, bonds, mutual funds, ETFs, and other financial assets via the money borrowed from a broker. This helps you lower your risk and improve your ROI. The only requirement is that you will have to maintain a certain specified amount in your Demat account as collateral for availing this facility.
