Margin Trading Avail This Facility With Caution
- Margin trading can help you invest more than you have
- Invest only if you have high conviction for the stock you have chosen
- If the stock price goes in the opposite direction, it can lead to deep losses
- Check the fees and costs that your broker charges to offer margin trading
The stock market throws up investing opportunities from time to time, but many a times investors are unable to lap them up due to lack of adequate funds. One way to get over this problem is to go for margin trading offered by brokers and avail of the opportunities when they arise.
Margin trading is a type of unique broker-client arrangement wherein the broker extends funds (margin) to the client for trading in securities. The client trades and after the pre-defined margin funding time frame, the investors or traders returns the funds back to his broker along with nominal interest.
However, this facility has both pros and cons. Here is how you can use this facility to your advantage and when you should avoid getting into such an agreement.
When Does Margin Trading Facility Work For You?
A through stock market investor knows which stocks to buy and at what price. For those who are not that thorough, there is ample information available in the public domain through research reports, which can help identify a stock that has potential for growth but is available at a reasonable price. Research reports, typically, can help you identify quality stocks.
But you may miss out the buying opportunities due to lack of funds since intraday leverage can only let you hold stocks till 3.10 pm and not carry forward the stock trade. In these types of situations, margin trading helps.
Let’s understand through an example. Suppose, due to some negative news about the information technology (IT) sector, the price of your favourite stock is down by 10 per cent. However, you have only Rs 50,000 to invest though you would like to put in Rs 1 lakh. In this scenario, If your stock broker offers a margin trading facility, then you could borrow Rs 50,000 from the broker and buy the quantity of your choice. You will have to pay interest, fees or any other charges as per the broker’s terms on the borrowed amount. To stop using the margin, you need to either sell the stock in the market or pay your broker the margin money used.
When Does Margin Trading Turn Unfavourable?
Ideally, you should use margin trading only when you have high conviction about the stocks you want to buy. However, there is a thin line between conviction and greed when it comes to stock market trades. When greed takes over conviction, margin trading could lead to higher losses.
Typically, MTF backfires for those who use this facility for stock market gambling. Some investors take huge positions in particular shares. If the price goes in the opposite direction, they bear losses. For instance, suppose your stock broker gives you a margin of three times your funds. Here you can buy shares worth Rs 4 lakh with Rs 1 lakh in your trading account. If the trade goes wrong and the share price falls by 15 per cent, you will lose Rs 60,000 or 60 per cent of the principal amount.
Margin trading is a great tool to tap market opportunities and can help maximize profit. However, you should also keep in mind that the chances of loss are equally high given the associated risks. In case of adverse price movements, one can even lose their assets or stocks. Use this facility only when you have high conviction and not for gambling. New investors should completely avoid it and seasoned investors should use this facility judiciously.
Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: email@example.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. Margin Trading is offered as subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017 and the terms and conditions mentioned in rights and obligations statement issued by I-Sec. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.