Margin Trading- Advantages and Risks
Margin trading in the stock market is a facility under which you buy stocks that you can’t afford. The investors are allowed to buy stocks by paying a marginal amount of the actual value. Cash or shares as security are paid as margin money. In this trading buying and selling of securities happens in one single session. The process requires an investor to speculate or guess the stock movement in a particular session.
A margin account permits the investors the resources to buy more quantities of stock than he or she can afford at any point in time. The broker would lend the money to buy shares and keep them as collateral. It helps the traders to earn huge profits. But it is risky, and investors can earn a profit only when total profit earned is higher than the margin.
Margin trading in India was allowed only through cash. But shares as collateral was restricted in India by SEBI. However new regulation by SEBI in 2018, investors can leverage their market position through margin trading with shares as security.
Margin Trading Facility (MTF) account facility permits the traders to do such trading. Traders have to maintain a minimum balance at all times.
- It is ideal for investors who are looking for a profit in a short time on the price fluctuations.
- This trading process helps investors to leverage their position in securities that are not from the derivatives sector.
- Maximum profit can be generated from the sum you invest in marginal trading.
- Securities in Demat account or investment portfolio are used as collateral for margin trading.
- This trading is closely monitored by stock exchanges and SEBI.
- There is a high risk associated with margin trading and have the chance to lose more than invested.
- A minimum balance has to be maintained in MTF account at all times. If you fail to maintain the minimum balance, then you would be forced to sell some or all the assets to maintain the minimum balance.
- If the investors fail to keep up to the margin trade agreement, the brokers have the right to take actions against the investors.