What is Stock Margin?

One way to take bigger positions and potentially increase your profits in the stock market with limited capital is by using stock margin, also known as Margin Trading Facility (MTF). Many brokers offer this feature, allowing investors to increase their buying power. However, despite its popularity, a lot of traders use margin without fully understanding how it works. In this blog, we’ll break down what stock margin really is, how it works, and the risks you should be aware of before using it.

What is Stock Margin?

Stock margin, popularly known as Margin Trading Facility (MTF), is a service offered by brokers that allows you to borrow funds to increase your investment capacity. In simple terms, you can buy shares worth more than the actual funds available in your account.

This is generally called leverage trading or margin trading. It is especially useful for those who want to trade in large volumes in the short term, but it also comes with risk as losses can also increase.

Example: You have ₹1 lakh and want to purchase shares worth ₹5 lakhs, then the broker can provide the remaining ₹4 lakhs. This means that now you can buy shares worth up to ₹5 lakh. 

How MTF Works : In the Margin Trading Facility (MTF), the investor can trade on the value of the entire transaction by investing a partial amount in his trading account. The remaining amount is lent by the broker, which has to be repaid with interest.

How the trade is done:

• You deposit some percentage of the total amount (Initial Margin).
• The broker lends the remaining amount.
• You buy shares and can sell them whenever you want.
• The loan has to be repaid within the stipulated time, otherwise the broker can sell your shares.

As per SEBI rules, MTF is available only on selected stocks and the minimum margin and interest rates in it are decided by the broker.

If you want to do margin trading at a low cost, Pocketful is a great option. It offers margin trading at one of the lowest interest rates in India, starting at just 5.99% p.a., and you also get up to 5x intraday leverage. Pocketful is especially suited for investors who want to gain more exposure in a smart way, all on a fast, simple and reliable platform.

Check Out – Stocks Available for MTF

Types of Margins in Stock Trading

There are many types of margins in margin trading, and each has a different role. If you want to trade seriously in the stock market, it is very important to understand them correctly. Below are the four major types of margins that are prevalent in the Indian market and are regulated by SEBI:

• Initial Margin : This is the minimum amount that you have to keep in your account to open a position. As per SEBI rules, it is decided on the basis of VaR (Value at Risk) and ELM (Extreme Loss Margin). Its purpose is to ensure that the trader has enough capital to bear the initial risk.
• Maintenance Margin : This is the minimum balance that you have to maintain in your account, so that you can hold an open position. If your funds go below this level, the broker may send a margin call and automatically close your position if required.
• SPAN Margin (F&O only) : The SPAN (Standard Portfolio Analysis of Risk) margin is applicable only for the Futures & Options (F&O) segment. This margin is calculated by NSE through a simulation tool and is based on the risk of the entire portfolio, not just a single trade.
• Exposure Margin : This is an additional safety margin mandated by SEBI and exchanges keeping in mind traders and market stability. It is charged over and above the SPAN and is generally applicable to all F&O trades. It is intended to provide extra protection during times of high volatility.

Read Also: What is MTF (Margin Trading Facility)?

Stock Margin vs Cash Trading

Features	Stock Margin Trading	Cash Trading
Investment Amount Required	Lower as broker provides additional funding	Shares can only be purchased according to the amount of money you have in your trading account
Risk	High risk	Low risk
Returns	Higher as profits increase quickly, but with increased risk	Stable returns
Interest	The broker charges interest on the borrowed amount	No interest has to be paid
Delivery option	Some brokers allow delivery, but interest applies	Upon making full payment, shares are transferred to your demat account
Margin Call Risk	If the price goes down the broker may ask for extra funds	There are no margin calls
Holding Period	Depends on the policy of the broker.	Can be held for the long term without any extra charges
Better for whom?	For active, short-term or intraday traders	For long term investors and beginners

Pros and Cons of Using Stock Margin

Margin trading is a tool that can be beneficial if used wisely, but a careless trade can also cause losses. Let’s know some of its major benefits and potential disadvantages, in simple language:

Pros of Stock Margin

• Higher profit potential with less capital : With the help of margin, you can buy shares of large value even with less capital. This is especially beneficial for those who have limited funds but want more exposure.
• Opportunity to increase returns : If your trade goes in the right direction, then due to margin you can get more profit than usual.
• Best for short term traders : Margin is a useful tool for those who trade intraday or for a few days because with this they can take many positions quickly.
• Smart use of capital : Due to margin, you can use your limited capital in different trades, which gives you a chance to take more profit.

Cons of Stock Margin

• Amplified Losses : While margin increases profits, it can also cause losses quickly. Even a little wrong move can prove to be costly.
• Margin call risk : If the value of the stock falls, the broker may ask you to increase the money (margin call). If you do not respond on time, your shares will be sold.
• Interest and charges : Interest has to be paid on the money borrowed. If the trade remains open for a long time, this interest can eat into your earnings.
• Mental pressure : Many times trading on credit increases fear and anxiety, which can lead to wrong decisions.

Read Also: Lowest MTF Interest Rate Brokers in India | Top 10 MTF Trading Apps

Key Factors to Consider Before Using Stock Margin

Some of the key factors to consider before using stock margin are given below:

• Your Risk Tolerance : There is an opportunity to earn money in margin trading, but the loss can also be equally big. If you cannot bear the market fall or sudden loss, then margin is not for you.
• Trading Experience Level : If you are a new trader, then taking margin without complete information can be dangerous. Using margin in the beginning without understanding the risk can cause huge losses.
• Brokerage Policies : The funding policy of every broker is different. Some brokers offer MTF (Margin Trading Facility) while some give margin only on MIS orders. SEBI sets minimum margin norms, but brokers may impose higher margins or lower leverage
• Interest Rates & Charges : The margin amount attracts interest. Some brokers like Pocketful offer margin at a minimum interest of just 5.99%, while others can go as high as 12-18%. These charges can reduce your profits.
• Stock Volatility : If you are trading in very volatile stocks, they are more likely to get margin calls. Less stable stocks have higher margin risk.

Margin Trading Facility (MTF) is a regulated service in the Indian stock market that is run under strict rules of SEBI. Its purpose is to ensure that investors are protected and brokers do not take unnecessary risks. SEBI has issued clear guidelines for all aspects related to MTF – such as which stocks are eligible for MTF, how much margin has to be paid, and to what extent the broker can provide funding. It is mandatory for all registered brokers to follow these rules.

Margin Calculation : Margin is determined according to two types of stocks:

• F&O stocks have relatively less margin due to low risk.
• On the other hand, non-F&O or low-liquidity stocks require more margin.

The broker uses variable margins such as VaR (Value at Risk) and ELM (Extreme Loss Margin) while calculating the margin.

Collateral and Pledge Process : When you buy shares through MTF, those shares are pledged and pledged with the broker. Now this process has become automatic in almost all brokers, meaning the investor does not need to give any pledge approval manually.

Margin Call and Risk Control : If the value of your portfolio falls, the broker alerts you about margin shortfall. If the value goes below the set limit, the broker can sell your shares — but before that you are given an opportunity to deposit additional margin.

Conclusion

If you want to take much larger trading positions with less capital, then Margin Trading Facility (MTF) can be a good option. But as beneficial as this facility seems, it also needs to be used wisely. Every broker’s terms and interest rates related to this facility are different, so it is important to compare different brokers before making any decision. With proper risk management, you can get good returns using MTF. It is advised to consult a financial advisor before using MTF.

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