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How To Do Margin Trading Through Demat Account?

Margin funding is a great tool for market participants if appropriately used, as you can boost your investment capacity.

    You can utilise your stocks to fulfil the margin requirements, which was not allowed before reformed margin rules. But, with the implementation of new margin rules, SEBI further toughens the margin norms. Based on the new mandate, a 50% upfront margin is required from March 1, 2021.

    Traders can use shares in their demat accounts to make margin payments only if such shares are pledged with the stockbroker after a proper client authorisation process through email and an OTP. Such a margin system is likely to strengthen risk management that will make the markets more efficient in the long run.
Margin Trading
Let us elaborate on the margin trading facility (MTF) with an example. Suppose you have Rs.2,00,000 using which you can buy 200 shares of a company @ Rs.1,000 each. Alternatively, you can go with margin trading to leverage your position. You can use this amount as a margin. The new applicable margin rate is 50%. You can now buy up to 400 shares of the same company @ Rs.1,000 worth Rs.4,00,000. The margin for your trade is 50% i.e. Rs 2,00,000.

If the company's stock price rises to Rs.1100, your profit is Rs 40,000, which is obviously much higher than 200 shares if you had purchased shares to take delivery. However, no one can ignore the risk of price fall. If the stock price goes down and you will make a loss, you will be forced to cover (square) the transaction. You have to sell the shares in your demat account if you could not maintain the minimum margin trading account balance, and the loss on your trade would be adjusted against your margin amount. When you open a demat account online, you can ask your broker about the pledging charges.

New Margin Requirements In The Commodity Segment

After revising the margin requirements in the equity segment, the markets regulator Securities and Exchange Board of India (SEBI) is reforming the margin requirements in the commodity segment. Where the equity margin rules were revamped to limit risk by limiting brokerages from providing excessive leverage and thus, protecting retail investors from unnecessary risks, the new margin rule in the commodity is aimed at increased liquidity.

It will be beneficial to hedge positions in both the commodity derivatives and related commodity index futures. As per the new rule, a gross margin benefit of 75% will be allowed on the initial margin. Eligible offsetting positions can take advantage of this new rule.

You invested in MCX NSE 0.32 % Gold contracts and are ready to trade a short position in MCX Bulldex, which tracks gold. Suppose the total margin required is Rs. 80,000, then as per the new margin rule, the applicable margin will be Rs 20,000 only after the discount of 75%.

A Few Facts Regarding Demat Stocks As Margin

  • The trader must have a margin trading facility account with the stockbrokers to utilise the margin trading facility (MTF).
  • Only SEBI-authorised stockbrokers can offer margin trading accounts.
  • You can pledge existing shares as collateral to pay margins. If your MTF account is under debit, but you have shares in your Demat account as margin, you can take new positions through a margin trade by transferring these stocks as collateral.
  • If stocks under collateral get appreciated in value, your margin from collateral stock will also increase. You can use the same to take other positions under margin trading.
  • If you receive the dividend on collateral stocks, it will be credited to your registered bank savings account.

Margin Trade Practices to Minimize Losses

As explained, margin trading is a viable technique to improve the returns with the benefit of leveraging. However, you have to consider the stock market's volatility due to which leveraged positions can be riskier. Therefore, it is inevitable to have the proper knowledge to use margin trading.

  • Utilise lower than the margin limit provided by your broker
It would be best to avoid borrowing the full allowed limit, especially for newcomers in the margin trading. Inexperienced traders can use a smaller amount to understand how it goes.

  • Make a trade wisely

If you are thinking of making a margin trade, you have to be very circumspect. A trader should go with margin trading only if there is the availability of sufficient cash to meet the margin call and bear the losses against your position and meet the margin call. Only if you are confident about your trend analysis, you can continue to execute a margin trade.

  • Settle the margin as soon as possible
Margin trading is like a loan on which the margin trader has to pay interest. It is always better to borrow for the short term and close the margin as soon as possible to avoid accumulated or higher interest amounts.

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