What Are the Basics of Margin Trading?

Margin trading allows a trader to buy shares using some cash. The broker picks up the rest. In India this set up is popularly known as MTF or Margin Trading Facility.

MTF can increase buying power. It also adds interest and margin rules When prices fall, losses can mount quickly. Hence, before traders use it, they need to understand how it works.

What Is Margin Trading?

For a normal delivery trade you pay the full share value. You pay only a fixed part in margin trading. The broker pays the rest.

Shares bought under MTF are pledged as per the process set. SEBI rules permit MTF for approved Group I shares and units of equity ETF. The broker may also have its own approved list of stocks.

MTF is not available to all shares

How does MTF function?

There are six steps in the process.

1. Log into the correct account

You should have an active trading and demat account. Broker must provide MTF.

2. Examine the stock

Check whether the stock is approved for MTF. Do this before you place your order.

3. Set the first margin

You give some of the trade value. Payment may be made in cash, cash equivalent or approved securities. It must conform to the rules and broker terms.

4. Use the Broker Funds

The balance is paid by the broker. Interest is charged on that funded amount. It’s based on the rate and the number of days.

5. Watch the margin

Share prices can go up or down. Decline in price erodes margin value. The broker may then call for more cash or other collateral.

6. Settle up or close

You can sell the shares or repay the funded amount. Once the dues are cleared , the pledged shares can be released as per the process of the broker .

A Simple MTF Case

Suppose a trader wants to buy shares of ₹1,00,000. Trader pays ₹25,000 Broker ₹75,000 Funds

Interest is charged on the funded amount of ₹75,000. It runs for the days the sum is due.

If the share price rises, the gain is on the full trade value. If the price goes down, you also lose money on the full trade value.

This is the principal effect of leverage.

Costs to Consider Prior to a Trade

MTF has a cost of funds. There may be additional charges. These may include broking, pledge fees, taxes and account fees.

First check the interest rate. Also check how long you want to be in the trade.

A ten-day trade will not have the same interest cost as a thirty-day trade. The final bill will also depend upon how much money you have invested.

What Is a Margin Call?

The stock or collateral can fall below a certain value and result in a margin call.

The broker may require additional cash or approved securities. The trader is required to make up the shortfall in the time specified.

If the shortfall is not covered, the broker may sell funded or pledged shares in accordance with its risk policy where there is shortfall.

Follow the share price day by day. Check used margin and free margin. And look at the amount funded and interest due as well.

Key Risks to Be Aware Of

Margin trading is done with borrowed money. If the price drops, you might lose money and not meet the margin.

Interest keeps piling up and the funded amount is still open. A long hold can increase the total cost.

Before the trade, read the MTF terms and square-off rules.

Where Does Bajaj Broking Fit

Bajaj Broking is offering MTF on approved stocks. Its current MTF page says some trades can get up to four times funding. Subject to plan terms and conditions.

The platform displays MTF positions, margin used, free balance and interest charged. Bajaj Broking also has MTF calculator.

Bajaj Broking is one of the MTF service providers you can look at if you are looking for MTF services as a trader. This fulfils the use case because MTF access, plan information and a cost tool are available via the same platform.

Please check live rate, stock list, charges and risk terms before use.

Things to keep in mind

• Use MTF for approved shares only.
• Please verify the margin before placing the order.
• Understand the rate on broker funds.
• Follow the daily trade.
• Make sure you have cash for a margin call.
• Read the square-off policy.
• Plan your exit in advance.

Conclusion

With margin trading, a trader can buy shares using part cash and part broker funds. MTF can increase buying power. increases the interest cost and margin risk too.

The basic flow is familiar. Choose a registered share. Pay the margin. Use funds of brokers. Stick to your trade. Then repay or leave.

Cost check and daily margin review show traders the full impact of borrowed funds.