Margin Money in Stock Market: What is it, Eligibility & Advantages | My Espresso

What is Margin Money in Stock Market?

In the stock markets, margin trading is a process in which you can invest in stocks that you otherwise cannot afford. You need to pay a marginal fee from the actual value to buy stocks. You can pay this margin money in cash or stocks, or securities.

Published on 29 January 2022

Simply put, margin trading is considered a way of leveraging an investor’s position in the market by investing in cash or securities. If you wish to trade in margins, your stockbroker will fund the margin trading transactions for you.

Once you square off your position in the market, the market will settle the margin. Also, you can experience again when your earned profits are much higher, or else, you can experience a loss.

Margin Money in Stock Market – SEBI Regulations

Now that you are aware of what is margin money, you need to have a clear understanding of the SEBI regulations related to the same. Till last year, margin money trading was allowed only with cash. Offering stocks as collateral wasn’t allowed.

However, SEBI (Securities and Exchange Board of India) recently relaxed this norm. Now, investors can furnish shares as security while trading in margin money in the stock markets.

Eligibility to Trade in Margin Money

Now, with proper knowledge about margin money meaning, you might feel like trading in the margin. However, there are a few things that you need to understand. You will first need to open a margin account with your stockbroker to avail of the MTF (Margin Trading Facility).

While opening the MTF account, you need to pay a certain amount. Also, you will need to maintain a minimum balance in your account at all times. In case you fail to do so, your trade will be squared-off. At the end of the trading sessions, the squaring-off position is mandatory.

Advantages of Margin Trading

Here are a few margin money trading advantages for an investor –

  • If you, as an investor, are looking for profits during the price fluctuations in the market, margin money trading is apt for you without having enough cash in place.
  • Securities on your Demat account could be used as collateral in margin money
  • Margin Trading Facility will enhance the rate of return on your capital invested.
  • SEBI and the stock exchanges are continuously monitoring the MTF.
  • MTF boosts an investor’s purchasing power.
    Also Read: What is Collateral Amount in Demat Account?

Attributes of Margin Trading

Here are some of the features of margin trading facility (MTF) –

  • As per SEBI’s revised regulations, only authorised stockbrokers can offer margin trading accounts to the investors.
  • MTF will allow an investor to leverage on positions in the stock market securities that do not belong to the derivatives section.
  • Investors are allowed to create positions against MTF in collaterals or cash through share trading.
  • SEBI and the corresponding stock exchanges predefine securities that are traded in MTF.
  • The margin trading positions can be carried forward to a maximum of N+T days. Here, N is the total number of days when the said position will be carried over, and T is the total number of trading days.
  • Investors who wish to take part in MTF should have a valid MTF account along with their stockbrokers. Also, they should accept the terms and conditions stating the risks involved with this kind of trading.
    Also Read: Foreign Exchange Market

Initial Margin and Maintenance Margin

Now that you are aware of what is margin money in trading, let’s have a look at the two different aspects of margin trading below:

  • Initial Margin: This is the cash deposit required to be paid while opening a new position in trading that is determined by a certain percentage of the value of the full contract. Whether you go for a long or a short futures position in MTF, the market will apply an initial margin.
  • Maintenance Margin: This is the minimum amount of the margin balance that an investor needs to have in their account to keep the share position in the market valid. The maintenance margin is the minimum amount that your stockbroker or the stock exchange will want you to have in your MTF account so that they can deduct the losses from it. So, in case you do not have that minimum amount in your account, it will increase your risk of not having enough money to be deducted against any loss in the future.

Conclusion

Trading in margin money in the stock market can increase an investor's purchasing power. However, it can also lead to huge losses if things do not go the way you have anticipated. Hence, it would be best to be extra careful when implementing the margin trading facility.
Also Read: how to Trade in F&O?

 

Chandresh Khona
Team Espresso

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