Margin Trading 

Margin trading is a trading style in which day traders execute high volume trades using lesser funds than actual transaction value. Day traders borrow the funds from their stock brokerage firm on interest to place their trades. The facility is known as Marginal Trading Facility (MTF). Stock Brokers and clients fix the commercial terms and conditions before the commencement of MTF. 

Traders need a marginal trading facility account along with a Demat account to use this service. A minimum balance is required to maintain your MTF account. As you know, margin trading is a two-sided sword. If a trader earns profit exceeding the margin amount, the margin amount will be deducted from the profit earned by the trader. In case a trader faces loss, he has to pay such a margin amount to the broker in cash or securities.  

SEBI’s Latest MTF Amendment

Margin trading facility is monitored by the Securities and Exchange Board of India (SEBI) very closely to safeguard the interest of traders. Because brokers have the access to use trader’s assets to collect margin funds. To maintain a higher level of transparency in margin trading, SEBI amends the rules from time to time. Recently new margin pledging rules and regulations have been implemented from Sep 1, 2020.‍ Traders have to create margin pledge separately from now onwards.

As per SEBI latest amendment, only corporate brokers having minimum net worth Rs. 3 crores can provide MTF to the traders. To offer MTF, a brokerage firm is allowed to borrow funds from scheduled commercial banks or NBFCs only. The broker can use his own funds also. 

A trader can keep Group 1 securities as upfront collateral with the broker to use Margin Trading Facility. It is necessary that the collateral stock must be different from the funded stocks using MTF. No mixing is allowed.

Features of Margin Trading

• Traders require a margin trading facility account to use leverage positions. 

• You need to keep upfront collateral (minimum 30% of the transaction value) with your broker to use MTF. 

• Only authorized brokerage firms are allowed to provide the margin trading facility to their clients as per SEBI regulations. Bajaj Financial Securities Limited (BFSL) is one of the authorized brokerage firms. 

• Not all stocks are MTF tradable. SEBI has pre-defined the margin tradable securities at respective stock exchanges.

• Brokers provide margin to traders at pre-decided interest rates. 

Benefits of Margin Trading

• Margin trading offers higher leverage that enables traders to buy stocks you cannot afford. If you open Bajaj Financial Securities Limited (BFSL) Demat account, you will be able to use margin up to Rs. 100 crores. 

• You can use securities in your Demat account as collateral for margin. 

• All MTF activities are under the monitoring of market controller SEBI, so there is no worry regarding collaterals. 

• It improves the rate of return even on the minimum capital deployed. 

Following are the benefits of MTF with BFSL:

• Hassle-free documentation

• Easy accessibility on the platform

• Maximize your MTF Limits up to Rs. 100 Crores

• Lower Interest Rate on used margin 

• Call & Trade Support

• Dedicated Relationship Manager

Margin trading Risk 

Borrowing through MTF is easier. But, it is not free from risk. Following are the risk involved in MTF: 

You have to maintain a minimum balance to your MTF account. 

In case you end up with losses in your trades, you may lose what you invested. You have to pay the margin loan with interest regardless of profit/loss on your trades. Therefore, using a stop-loss strategy is a smart move to limit losses.

If a trader fails to meet a margin call, a broker can liquidate your assets to recover the loan amount. 

Margin trading can be an effective way to make money but only if handled without any greed. It is advised to use the marginal trading facility in limits. Day traders, especially using MTF are always advised to apply strategies to execute a trade.