Sanaya kushwahaTrading in the stock market using margin enables an investor to leverage the market opportunities to its fullest. In India, margin trading has reduced the biggest challenge faced by investors- lack of funds.
Interestingly, the surging market prices have pushed more and more investors to opt for margin trading.
Reports suggest that in January 2024, the MTF book of stockbrokers shot up to ₹73,600 crores setting up an all-time high record. While the numbers show an inclination towards MTF, as an investor you might find yourself evaluating the benefits and risks of margin trading.
Tag along as we smartly analyse the risks and rewards of margin trading funding.
Understanding Margin Trading
Before discussing the risks and rewards, it is crucial to understand what margin trading is. Margin Trading is a financial product that allows an investor to trade in the stock market beyond their actual capital reserve. This type of trading enables the investor to leverage the market movements without being restricted by capital outlay.
Under margin trading funding, the broker provides margin money to the investor with a pre-decided interest rate. This helps the investor to trade in bigger sticks and the broker earns through interest rates.
Let’s take an example- Say you want to buy stocks worth ₹1,000 and your trading account has a balance of ₹200. Using margin trading, you can borrow ₹800 from ypur broker and invest in the stocks of your choice.
Margin Trading: What’s in it For You?
Buying on margin bears several rewards as it expands the investor’s purchasing power to offer flexibility. Let’s evaluate the benefits of margin trading in detail:
1. Expands the Purchasing Power
The biggest advantage of margin trading is that it expands the purchasing power. Limited capital outlay is possibly the biggest challenge faced by many Indian investors but with margin trading, they are provided with additional funds to trade in the stock market freely.
2. Diversify a Concentrated Portfolio
As an investor, you don’t want to put all your money in stocks from one company as this translates into higher risks. Diversifying your investment is the first step towards an impressive investment portfolio and with margin trading, you can invest in multiple stocks without having to put in money from your pocket.
3. Convenient Line of Credit
Margin trading is like a bank loan with the only difference in its convenience and instant disbursement. Once your account has a margin agreement you can easily borrow money without having to provide documents each time.
Risks Associated with Margin Trading
Before you leave, take a look at the risks associated with Margin Trading:
1, The Burden to Repay
Investors, often, make emotional calls with margin trading and forget that they are under an obligation to repay every single penny they have borrowed through margin. Regardless of how your stocks are performing in the market, you have to repay the amount borrowed.
2. High Interest Rates
Finding the lowest MTF interest rate enables an investor to trade without financial burden. However, some brokers charge high interest rates in exchange for wide margin borrowings that often lure the investor to overlook the interest rate. A higher interest rate adds an extra burden for the future.
3. Maintaining Margin Account
Margin Trading requires an investor to maintain margin money in their account to continue utilising MTF. At times, the margin money requirement is rather high which restricts the investor from putting money in new stocks.
The Bottom Line
Margin trading is a reliable method that has been helping investors to trade in bigger stocks with a convenient line of credit. However, trading with margin is not free from its risks and requires the investor to evaluate both sides of the coin smartly before making a move.
As a beginner, if you are planning to trade with a margin, remember that you are subject to interest rates and have to repay the borrowed amount. Once you have a grip on this, you are set to create an impressive investment account.
