What is Margin Trading in India?

When Might Margin Trading be Used?

What happens if you are very sure that you can make a good profit by buying and selling an item that you see advertised at a very reasonable price, yet you do not have the full amount of cash available to make the initial purchase? You could easily miss the opportunity to purchase that item, as it will surely not be long before somebody with more money than you gets their eyes on it and snatches it away. In a situation like this, you might well consider asking your friends and family to lend you the money to make the initial purchase. If they have confidence in your knowledge of the product, they may well be happy to lend you the money for a small share of the eventual profit.

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How does Margin Trading Actually Work?

Margin Trading is somewhat like the above example. Once you have some experience and knowledge about the state of the stock market and you want to take things to a higher level without investing more cash, Margin Trading may be an option you wish to explore. Let us now explain more about the concepts of Margin Trading. Based on the above example, let’s assume you wish to purchase some stocks as you are confident that their worth will rise dramatically. A qualified broker such as GOODWILL COMMODITY INDIA may be able to arrange for you to buy those stocks without stumping up all the cash. They may arrange for you to make the purchase at a fraction of the actual price, on the agreement that the balance be paid to them at an agreed time. If all goes according to plan, when the time to pay back the loan arrives, the stocks are speculated to have risen in value to such a degree that they can be sold on at a price that more than covers the original loan, and still results in a net gain for the trader.

Further Benefits of Margin Trading

What makes Margin Trading even more attractive is that the Securities and Exchange Board of India (https://www.sebi.gov.in) has now made it possible in certain circumstances to conduct Margin Trading without putting forward any cash whatsoever and instead of using other shares you hold as collateral. This can have the effect of generating a very high rate of return for only a small amount of capital invested. It also gives you access to go for stocks that you would ordinarily be unable to afford, therefore it widens the opportunities for the trader.

What to Avoid when Margin Trading?

You will now be aware of some of the benefits of the MTF (Margin Trading Facility), but as in all fields of life, one must be willing to accept the rough with the smooth. That is to say that anyone considering availing of the benefits of MTF must also educate themselves of the associated risks involved. As you are in effect borrowing money from your broker, there will be binding agreements in place which dictate what will happen should the value of the stocks you buy happen to go down instead of up. Of course, they would expect you to settle the balance by injecting more cash, otherwise, they will usually reserve the right to take action against the borrower in order to recover their dues. This is not limited to, but may include the liquidation of other assets in the Demat account or portfolio of the borrower. There will also be a stipulated minimum balance that must be maintained. The holder of an account that falls below the required minimum balance will be required to top up the account to avoid triggering the broker to take action. For these reasons, it is advised to use the facility with caution to lessen the chances of finding yourself in such a situation.