Know About Margin Trading: Risks and Advantages
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Margin Trading Funding (MTF) provides you the power to buy more financial securities than you can afford at any point of time. Margin trading is a leveraging strategy to enhance the buying potential in financial markets. Through MTF, you can buy shares of larger amount by just paying the margin and rest will be funded by the stockbroker. The broker lends you the funds to purchase securities and keep some of your shares as collateral. The earnings on these shares will be entirely yours even if purchased through the margin account. The stockbroker will charge you an interest for the number of days position is carried.
 
Advantages of Margin Trading
 
Among various advantages of margin trading, main advantages are enumerated below:
 
  • Easy to Activate
    Margin Trade Financing is one of the best ways to get funded for stock trading provided you maintain a minimum margin balance in your account. To activate and make the most of this facility, one needs to duly sign and send the Power of Attorney (POA) document to their stockbroker. Once received, your margin account and MTF facility will be activated.
     
  • Tap the Trading Opportunities 
    Margin trading enables you to take advantage of short-term price fluctuations even if you do not have enough funds at that point of time.
     
  • Better Rate of Returns
    Margin Trade Financing can potentially magnify your returns and improve your rate of return on the funds invested, provided you are involved in a well-analysed trade following the market direction and the trends. Your profit from margin trade will be impacted by the cost of brokerage and the interest on margin trade funding amount. The lower your cost of brokerage and interest on margin trade funding amount, the better will be your return on the investment. 

    Bajaj Financial Securities Ltd., with an ever-growing client base, provides you with Bajaj Privilege Club subscription that charges one of the lowest rates on brokerage and MTF interest rates in the industry. Bajaj Privilege Club members enjoy Equity Delivery, Intraday and F&O trading at 75% lower brokerage, charging just Rs.5/order (whereas most competitors charge Rs. 20 per order) that helps them to save on trading cost considerably. They can also avail Margin Trade Financing (MTF) facility for only at 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 which can help you grab the market opportunities. However, you may need to search for a stockbroker offering lower interest rates. Your search may end up with Bajaj Privilege Club, offering one of the lowest interest rates in the industry, i.e., 8.5% per annum. You only need to pay Rs.23.28 per day for 1 lakh MTF.
     
  • Monitored under Capital Market Controller SEBI
    SEBI monitors margin trading activities very closely. It continuously works to safeguard the interest of investors. Therefore, your funds and securities are secured and safe.
     
  • Longer-term to carry a position
    When you buy stocks under MTF, you get a decent duration of time to carry the position. This way, you have a wider time frame to monitor the price and exit the position during a favourable opportunity according to the market trends.

    With Bajaj Financial Securities Ltd., an MTF position can be carried for a period of up to 365 days. 
 
Risks Involved in Margin Trading
 
An investor or trader should know that with margin trading, there comes attractive profit potential with easy access to required funds, but it also bears some risk. Following are the risks that one should understand before taking charge of a margin account:
 
  • Risk of the amplified effect of losses
    In margin trading facility, you are using borrowed funds from the stockbroker available at a low interest rate. Therefore, your financial obligations are much higher than regular trading. If your trade goes against you, it amplifies the effect of loss.
     
  • Risk of unmanageable repayment
    Margin interest is accrued each day and charged monthly. You need to pay interest on borrowed funds regularly; otherwise, it may build to unmanageable levels and you will be penalised for unpaid interest. Hence, it is recommended to compare the interest rates from different stockbrokers and avail the facility at a lower interest rate only as it would help you save the extra cost incurred. 
     
  • Risk of being unable to meet a margin call 
    To avail MTF, you have to maintain the margin amount in your Demat and Trading account. It is a specific percentage of your trade value that should be maintained in your account, depending upon the stockbroker and the type of securities you are trading. It may increase or decrease with the number of security and market conditions.

    If the value of the collateralised securities under MTF declines below the minimum margin requirement, your broker can issue a margin call. You will have to add cash or liquidate your positions for minimum balance maintenance. If you fail to take prompt action, your stockbroker can sell securities.
 
To opt for the BPC you need to open a demat account first with BFSL.
 
Thus, you can take leverage under Margin Trading Facility with a SEBI-registered stockbroker and take cautious positions to book significant profits from the market. Check the prerequisites of margin trading, the leverage offered, and interest rates with your broker before involving in a margin trade.
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