At times it happens that there is an opportunity to make profits from the market conditions. But you don’t have enough funds in the trading account. At this time margin trading funding helps you to take advantage.
A margin trading facility will allow you to buy shares more than the funds you have. It allows you to buy stocks that you can’t afford. This article will explain how can you use a margin trading facility for trading.
What is Margin Trading Facility?
Margin trading facility is an important feature offered by stock brokers. It allows you to borrow money from a stock broker to buy shares. By availing of this facility, you can buy more shares than the funds you have in the trading account.
You can avail of the margin trading facility by opening a separate margin trading account with your stock broker. You are required to maintain a minimum balance with a broker, which is known as a margin amount. When you trade you need to have a certain percentage of traded value in the trading account before the trade is initiated and the remaining amount is funded by the broker. The broker charges interest on this amount funded.
An investor with an stock trading account can avail of the margin trading facility either by contacting the broker or by applying online through the company’s website.
Previously you can avail of the margin trading facility only on cash. But Sebi brought changes to this rule in 2017. As per this new rule now you can even use your securities as collateral to trade under a margin trading facility.
How the Margin Trading Facility Works?
Margin means the minimum amount required in a brokerage account to trade. By availing margin facility you are allowed to use borrowed funds from a broker to buy the shares. For this, you need to have a margin account with the broker.
The broker provides the funds in the margin trading account. This is short-term borrowing against the collateral of cash and securities. These funds can be used by you to buy shares. The broker will benefit by charging interest on the borrowings.
For example, you see a good market opportunity and want to buy shares worth Rs 50000. The minimum margin here is 30%. So you need to have a minimum of Rs 15000 in the margin account as minimum margin and remain amount you can borrow from the broker.
Features of Margin Trading Facility
Accepting Additional Terms and Conditions
When you open the margin trading facility account with the broker you need to accept and sign the additional terms and conditions. This justifies that you are aware of the benefits and risks involved in margin trading.
Through the margin trading facility, you can take the benefit of leverage positions in securities which are not from the derivatives segment.
Minimum Balance Requirement
You always will have to maintain a minimum balance in the margin account. In case the balance reduces then you need to add cash or sell the securities to fulfil the balance requirements.
This article has given you a complete idea of how can you use a margin trading facility for trading. This facility fulfils your funding needs for investing and trading. Always take care to have the minimum margin amount in the account to avoid any penalty for short margins.