The term margin trading refers to trading in which an investor increases their potential return on investment by investing more than they can afford. Here, investors can buy stocks at a low price relative to their actual value. These trading transactions are funded by traders who provide investors with cash to buy stocks. Once investors have established their position on the stock market, this margin may later be settled.
In that context, margin trading allows investors access to an increased amount of capital for investments, which enables them to take advantage of their position in the market either through security or cash. In the end, this trade helps to raise returns for investors, leading to higher profits on successful trades.
As margin trading proves beneficial for traders, let’s look at the various benefits offered by margin trading.
What Is Margin Trading?
Using borrowed funds from a broker to trade a financial asset, a security for a loan from a broker, is referred to as margin trading. Since margin trades require your brokerage account holders to keep a low balance in their accounts, they are regarded as less risky than traditional trading. Since profits or losses from margin trading are based on the total value of the position, margin allows investors to leverage their accounts to make a more significant profit.
Although margin trading can be used for many types of assets, it is most commonly used for trading stocks. In stock trading, margin trading allows positions to be opened based on leverage generated from peer-to-peer lending providers, which enables traders to open positions.
Since margins allow you to achieve higher returns than traditional cash accounts, professionals increasingly use margin trading. But, if something goes wrong for you, it may also result in a more considerable loss.
Eligibility for Margin Trading
You must have a margin account with the broker MTF to use the margin trading feature. The margins vary from one broker to another. You must pay a specified minimum amount when setting up an MTF account. Every time, you’ll need to maintain a certain degree of equilibrium. Your trade will be null and void if you maintain a minimum balance. The squaring-off position will be purchased at each trading session’s end.
Advantages Of Margin Trading
The advantages resulting from this trade process may be summarised as follows:
1. Leverage Market Position
In such trading, investors are encouraged to leverage their positions in securities other than those of the derivatives sector.
2. Maximise Returns
This will make it easier for investors to get maximum investment returns.
3. Ideal to generate short-term profits
Margin trading is a good option for those investors who want to benefit from short-term fluctuations in the market price, although they do not have any cash at their disposal.
4. Utilise Securities
Collateralized securities can be used as collateral for margin transactions by investors in a Demat account or an investment portfolio.
5. Regulated under SEBI
The stock exchanges and SEBI shall monitor the margin trading facility continuously.
What Is The Functioning Of Margin Trading Through Mtf?
The investor gains greater returns than would be possible if they had invested in securities solely with his funds when an investor bought securities through MTF accounts and then saw their value increase over the interest charged. In contrast, a broker will charge an interest rate on money in MTFs until the loan has been paid out, making it more difficult for investors to buy securities.
Consequently, investors will suffer losses at the same time that they have to pay a broker’s commission on margin financing if securities do not appreciate and instead fall in value.
Risks In The Area Of Margin Trading
Although margin trading allows investors to increase their profit margins, several risks can be associated. The risk is mentioned below;
1. Risks of Liquidation
When investors do not fulfil their obligations under the margin trade contract, brokers can sell MTF assets to compensate for losses.
2. High Risks
Due to the possibility of investors losing more than they are investing, margin trading poses a significant risk.
3. Minimum Balance Maintenance
At all times, investors are required to maintain at least a minimum balance in their MTF account. If the balance does not meet the broker’s requirements, an investor must give up additional cash or dispose of some stocks to keep a minimum balance.
If the price of an asset moves as you would have expected, or if you lose more than your initial deposit if a trade happens against you, margin trading can enable you to leverage profits. If you want to start with margin trading, use an online app like blinkX. blinkX Trade is a platform JM Financial Services operates to perform complex trading at superfast speeds. It offers a perfect trading portal for all investors’ profiles, equipped with the latest features and tools.
