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E-margin Trading: Evaluating the Concept through the lens of an investor

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Synopsis:

Margin trading is a facility offered by stockbrokers to investors and traders to buy securities and assets in the stock market beyond their actual buying capacity. E-margin is a multifaceted facility with advantages and risks. You can leverage the facility to your benefit with risk management strategies and smart trading methods.

The stock market is a volatile space that can present an opportunity to make tremendous profits at any given time. Imagine not using the opportunity to your benefit because of financial constraints. Painful. The e-margin trading facility serves as a bridge between your investment goals and economic capacity by allowing you to invest more than your financial capacity. It will enable you to leverage the market trends to add profit to your investment portfolio. There are multiple ways in which margin trading enhances the chance of profit-making so tag along as we discuss the varying features of MTF. 

Understanding E-Margin Trading  

E-margin trading is a facility offered to investors and traders to leverage the market trends for widening the profit window by offering a chance to invest more than the actual purchasing power. Here are the key features of e-margin in the stock market that can help you understand E margin in share market better:

  • Margin trading is like a loan provided to invest in the stock market.

  • The loan is offered by a broker once you open a trading account.

  • A broker offers a loan depending on the value of your investment portfolio and the loan offered is called margin. 

  • Your investment serves as collateral against the margin amount you take or charges an interest amount on the margin offered. However, the collateral can be sold to increase the profit for repayment, in most cases. 

How Does It Help in Funding Your Investments?  

Now that you know what is e margin trading, let’s explore how it can help in funding your investment:

  • Eliminate the Financial Restraint

    Seizing an opportunity in the stock market is the key to excelling as a trader and e margin ensures to provide a financial net when you need it. It allows you to take a large position without having to pay the entire amount from your capital thus eliminating financial restraints that stop you from taking bigger steps. 

  • Enhance Profit Making

    MTF allows you to multiply your gains without taking a financial burden of 100% payment. Additionally, investing all your money in a single security regardless of whether it appears profitable is not an ideal step. MTF lets you leverage the opportunity without going all out with your money.

  • Provides Flexible Repayment Options

    E margin is provided to you by an online broker. Now, with multiple options available you can choose a broker that offers you a flexible repayment method. Competitive interest rates and adequate time to repay let you take complete advantage of the security you invested in through margin trading. 

  • Safe and Secure Investment Method

    Investment and trading through MTF is a safe and secure option. Margin trade is regulated by SEBI guidelines that are constantly updated to meet the changing requirements of the stock market. Additionally, choosing a reliable stockbroker ensures that you do not get scammed into paying numerous hidden charges of processing. 

Components of E-Margin Trading  

E-margin allows you to buy securities in the stock market by paying only a portion of money from your pocket. Before you proceed with MTF options provided by your broker, let’s evaluate the key components first:

  • Margin trading is an option provided by brokers to leverage a position in the market beyond your financial capacities.

  • SEBI has mandated only authorised brokers to offer margin trading. Remember that individual parties or partnership brokerages are not authorised to offer MTF. 

  • SEBI allows margin trade facility against both cash margin and shares in collaterals as opposed to earlier when only cash margins were allowed.

  • There are pre-decided Terms and Conditions featuring the benefits and risks of MTF that must be accepted by the broker and investor.

  • To apply for MTF, you have to submit an undertaking with your approval of the Terms and Conditions of MTF.

  • You do not need a separate MTF account, e margin can be done through your existing trading account. 

How E-Margin Trading Works

E-margin trading works on the simple concept of providing financial assistance instead of interest like a loan and was introduced to back investors and boost the economy. The Federal Reserve, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) are the two governing bodies for margin trading along with SEBI. 

Brokers have the liberty to decide their T&Cs before providing e-margin, however, certain regulations bind the working of e-margin trading:

  • Minimum Margin

A minimum amount is mandatory to be deposited to buy securities through MTF.

  • Initial Margin

The initial margin is the amount that you have to pay to cover the payment of security brought. 

  • Margin Maintenance

When you own securities through margin, you have to maintain a certain stipulated amount in your margin account while you continue to hold the security on margin. 

Regulations and Considerations

Margin trading is an amazing facility that gives a chance to amplify profit. However, after understanding what is e-margin you must have an idea that there are risks attached. To minimise risks and discipline the brokers and investors, margin trading is performed under certain rules and regulations. Here’s how SEBI regulates margin trading-

  • It is mandatory to maintain an upfront margin at the beginning of margin trading.

  • There is a penalty on short-margin which was not applicable earlier.

  • Initial margin is required in both cash segment and share dealings. For share dealings, a minimum 20% margin is required and for cash segments also 20% initial margin is mandatory. 

  • All the rules of margin trading are applicable on both buying and selling shares.

  • The “buy today, sell tomorrow” facility is no longer available under MTF. You are eligible to sell a share two days after receiving it. The same rule applies for the cash segment. 

Note- Make sure to visit the official website of SEBI to check the latest notification regarding new rules and regulations of margin trade. 

Investing in the stock market through e-margin facilities can lead to profitable returns however it is also associated with risks. Let’s take a look at 

considerations to upskill your risk management:

  • Invest Wisely

    The key rule of investment in the stock market is to invest only when you have an appetite to bear the loss. A margin from your broker only provides financial assistance. It is on you to invest wisely and ensure a smooth repayment of the margin amount, even in case of a loss. 

  • Borrow Less than What You Can

    Brokers might offer you flashy margin amounts but it does not mean that you squander all of it to make investments. Borrow less to build confidence and upskill market reading first to take the next big step.

  • Ensure Short-Term Borrowings

    Margin amount is offered by brokers against interest rates and collaterals (the security you purchase). The longer you take to repay the higher the amount gets. Borrow for a short term to avoid a financial burden and to get your security liquidated fast. 

  • Read the Market

    Your trading application is designed to provide you with quick data analysis featuring market trends and patterns. Use analytical tools to understand the market carefully before making an investment and avoid quick decisions based on the money offered by stockbrokers to lure you. 

Example of Margin Funding in Trading 

If you are still unsure about what is e margin trading, then here’s a simple example to help you understand the concept:

  • There is a share of ₹5,000 in the stock market and your market reading suggests it to be a golden ticket to make a profit but your buying power is only ₹2,000.

  • You apply for a loan of ₹3,000 to purchase the security worth ₹5,000.

  • This loan amount is provided to you by a broker authorised by SEBI. The loan amount is called the margin.

  • You use the margin to invest in the security and till the time you repay your broker, there is a certain fixed interest amount applicable on ₹3,000 that you borrowed. 

  • In some cases, the security you purchased is also held as collateral i.e. as a mortgage for the loan.

This is how e-margin works and encourages investors to leverage the market to create a strong investment portfolio. 

Conclusion

Margin trading is a leveraging facility that encourages investors and traders to amplify their potential to make a profit. It provides a chance to invest beyond the financial capacity with a minimal interest rate of the margin amount. Investors, in the past, have used MTF to create a strong portfolio by diversifying their investments and multiplying profit through smart trading.

However, since the stock market is a volatile landscape, MTF is also subjected to risks and it is at the investor’s discretion to borrow and invest wisely. Risk management strategies and market reading can create a shield against huge losses.

Now that you are well-versed with the concept of e-margin trading you are ready to embark on your journey in the stock market with a fresh strategy.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

Frequently Asked Questions

What is e-margin trading?

Answer Field

Margin trading is a facility provided by stockbrokers to investors/traders that allows the latter to purchase securities and assets beyond their actual buying capacity. E-margin works as a loan that is offered for investing and trading purposes.

How does e-margin trading work?

Answer Field

E-margin trading works on similar principles that a loan functions on. Margin amount is offered against an interest amount and/or collateral held against the amount taken. The borrower benefits from the margin amount and the lender enjoys the benefits of interest rates and collateral.

What are the components of e-margin trading?

Answer Field

The main components of e-margin trading are a borrower, lender and margin amount. MTF is handled and regulated by SEBI.

What are the benefits of e-margin trading?

Answer Field

E-margin is a leveraging facility that provides an opportunity to buy beyond the existing financial capacity of an investor, widen the profit margin by taking benefit of the market trends and promising a flexible repayment method.

What risks are associated with e-margin trading?

Answer Field

The stock market is a volatile space that makes e-margin trading prone to risks, as well. Interest costs, margin calls, amplified losses, leverage risks and liquidation are common risks attached to margin trading that can be avoided with smart strategies and wise investments.

How to get started with e-margin trading?

Answer Field

Open a demat account/trading account and request MTF by filing an undertaking agreeing to your broker’s terms and conditions of margin trading. Once your request is approved, you can leverage the benefits of e-margin trading.

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