What is Intraday Margin Trading?

Margin trading is a method of investing in securities by taking an upfront loan provided by the broker. In this system, traders invest their own capital as a deposit, whereas a broker lends the remaining amount required by the owner to complete a trade. This deposit is the margin, calculated as a percentage of the total value of the transaction.

Margin trading essentially means leveraging the available capital to gain access to a larger size in markets. This facility amplifies potential returns on a favourable movement of markets. However, this may also increase the associated risk as losses can also exceed beyond initial investment. It's important for individuals to understand what is margin trading, margin requirements, interest charges, and risk management before using this kind of trading method. 

How Does Margin Trading Work? 

Understanding how margin trading works can help readers know what is margin in share market and how borrowed funds are used to take larger positions. 

Opening an MTF Account: Investors must open a separate MTF account with their broker. This account is distinct from a regular trading account. The broker disburses funds into this account, which the investor can use to purchase securities. These funds represent a loan provided against collateral. 

Providing Collateral: The investor provides a portion of the total purchase amount as collateral. This amount is called the minimum margin. The collateral can be in the form of cash or securities already held in the portfolio. The broker holds this collateral as security against the loan. 

Executing the Trade: The broker provides the remaining funds required to complete the purchase. The investor can now buy securities worth more than their available capital. The purchased securities are held in the MTF account until the loan is repaid.  

Example: 

•  An investor wants to buy shares worth ₹90,000 but does not have the full amount. 
• If the margin requirement is 25%, the investor pays ₹22,500. 
• The broker may provide the remaining ₹67,500. 
• Interest could apply on the borrowed portion. 

What are the Features of Margin Trading? 

Understanding the key features helps clarify the margin trading meaning and how it works in share market. 

• Collateral: Investors can use cash or existing securities in their portfolio as collateral. The broker accepts this collateral to provide the loan for purchasing additional securities. The value of collateral determines the borrowing capacity. 
•  MTF Account: All margin transactions occur through a Margin Trading Facility (MTF) account. SEBI and stock exchanges define the operational framework for these accounts. The account structure ensures transparency and regulatory compliance. 
•  Authorised Brokers: Only SEBI-registered and licensed stockbrokers can offer margin trading facilities. Investors must verify the broker's authorisation before opening an MTF account. This requirement protects investors from unauthorised lending practices. 
•  Margin Increase: When markets perform well and stock prices rise, the value of collateral securities increases. This appreciation can enhance the margin available in the account. Investors may then have the opportunity to purchase additional securities using the increased margin capacity. 
•  Carry Forward: Margin positions can typically be carried forward for a specified number of days. The carry-forward period is generally expressed as T+N days, where T represents the transaction date. Investors should confirm the exact carry-forward period with their broker, as terms can vary. 

Benefits and Risks Involved in Margin Trading 

Understanding the advantages and risks can provide a clear view of what is margin trading in stock market and how it affects potential gains and losses. 

Important Terms in Margin Trading 

Here are some of the important terms investors should always remember in margin trading: 

• Margin Call: The broker issues a notification when the trader's account falls short of the required margin maintenance amount and requires the deposit of additional funds or the liquidation of positions. 
• Margin Requirements: The amount of money typically required by traders to deposit with their broker to use the margin facility is a percentage of total transaction volume. 
• Securities Transaction Tax (STT): STT is a government tax charged on buying and selling securities. It is collected through the stock exchange and shown in your contract note by the broker. 
• Capital Gains Tax: A tax that is levied on the sale of securities and is either short- or long-term in terms of holdings. 
• Dividend Distribution Tax (DDT): DDT was earlier paid by companies, but it has been removed. Now dividend income is taxed directly to individuals. 

Conclusion 

Margin trading is a tough trading activity that beginners should learn carefully. Even those with knowledge should use caution while employing margin for the same. Margin offers traders more purchasing power, but it should be utilised carefully for day trading to prevent traders from suffering significant losses. Sticking to the rules of a margin account can help reduce margin calls and the need to add extra funds. Using a reliable stock market app can assist traders in monitoring their positions and managing risks effectively.