In this article, we will discuss
- Understanding Margin Trading
- Margin Trading Trends and Innovations to Look Out For
- Enjoy a Feature-Rich Margin Trading Experience with Samco Securities
- Conclusion
Buy Now, Pay Later (BNPL) is a relatively new concept that has caught on very well in India. It allows you to purchase products and services and pay for them later. Although BNPL is something that Indian consumers are getting to enjoy recently, a similar concept — known as margin trading —has been in existence for a long time in the financial markets.
Despite being available for years, the facility has only recently gained popularity. According to ICRA, the credit rating agency, the margin funding book of stockbrokers has increased significantly in the last few years. The funding, which was at ₹7,100 crore in February 2020, has now grown to over ₹54,537 crore as of January 16, 2024.
But what exactly is margin trading and how is it going to evolve in the future? Let us explore this unique facility and delve into the possible trends and innovations that are likely to shape its course.
Understanding Margin Trading
Margin trading, also known as a margin trading facility (MTF), enables you to purchase stocks even if you are short of funds. All you need to do is deposit a fraction of the entire trading value as margin money. The remaining amount will be funded by your stockbroker at a nominal interest rate against the very shares you purchase using the facility.
Once you sell the stocks, your broker will deduct the borrowed amount, along with interest and other charges, from the sale value and credit the remaining amount to your trading account. By using MTF wisely, you can enter into much larger positions by simply paying a small amount as margin money, enabling you to amplify your profits significantly.
Here is a hypothetical example to help you understand how margin trading works.
Say you wish to buy Rs. 50,000 worth of stock in Company A. With traditional trading systems, you would need to invest the entire Rs. 50,000 upfront to purchase the stock. However, by opting for margin trading, you would only need to deposit, say, Rs. 12,500 (25% of the value) as margin money. The remaining amount of Rs. 37,500 will be funded by your broker.
In exchange for lending Rs. 37,500, your stockbroker will levy interest at say 15% per annum. As an additional safety measure, they will also pledge the stock you purchase. When you finally sell the stock, you would have to repay Rs. 37,500 along with interest at a rate of 15% per annum for the entire period of holding.
As you can see, with the margin trading facility, you were able to control a larger position worth Rs. 50,000 with a relatively smaller initial investment of Rs. 12,500.
Margin Trading Trends and Innovations to Look Out For
As margin trading continues to get more popular, the facility is likely to undergo transformative shifts in the future. As a trader looking to capitalise on the benefits offered by this facility, you need to remain aware of the various emerging trends and innovations. Here are some of the major things you need to look out for.
Widespread Adoption of Margin Trading with T+0 Settlement
With the T+1 settlement already underway in full swing, the Securities and Exchange Board of India (SEBI) is now shifting their focus towards the T+0 settlement cycle. In fact, the stock exchanges have already implemented a T+0 settlement cycle for a limited pool of 25 stocks starting on March 28, 2024.
With T+0 settlement, stocks that you purchase will be credited to your demat account on the same day. Similarly, if you’re selling a stock, the funds would be credited to your account by the end of the transaction day.
Once the T+0 settlement cycle is fully implemented across the entire stock market, the adoption of margin trading is likely to reach meteoric levels. Since you won’t have to wait until the shares are credited to your account to sell them, you can implement margin trading strategies that were previously not possible. Also, you can initiate more margin money trades even with limited funds.
Integration of Artificial Intelligence (AI) and Machine Learning (ML)
Artificial Intelligence (AI) and Machine Learning (ML) are already making inroads into the financial markets. These cutting-edge technologies are also expected to revolutionise margin trading in the future as they can analyse vast amounts of data at incredible speeds and provide crucial insights, patterns and trends in market data in real-time.
For example, AI/ML predictive algorithms can forecast market movements and suggest optimal times to enter or exit trades to keep margin trading costs to a minimum.
Stockbrokers could also implement these technologies into their margin trading risk management systems. For instance, they could use predictive algorithms to identify stocks that are more likely to experience high volatility and use the insights to dynamically adjust the leverage they offer for stocks.
If a stock is exhibiting or likely to exhibit increased market volatility, brokers could reduce the leverage offered for the stock for the time being until the volatility subsides. The dynamic adjustment of leverage could potentially help mitigate risks and losses.
Increased Regulatory Scrutiny and Compliance
As margin trading continues to grow in popularity among retail investors, it is likely to attract more attention from the various regulators of the financial markets. Increased scrutiny could lead to stricter rules and standardised practices across the industry, requiring both traders and stockbrokers to adhere to higher compliance and risk management standards.
This might potentially increase operational costs, which often have a cascading effect on the costs incurred by the end user. However, increased regulatory involvement in margin trading could also boost investor confidence and promote a more stable trading environment.
Better Risk Management Tools and Techniques
Despite the various benefits, margin trading also has its downsides. It could potentially amplify your losses if the market moves against your position. This is precisely why it is important to implement comprehensive risk management strategies when trading trending stocks on margin.
Future innovations in margin trading are likely to focus on introducing new and more sophisticated risk management tools and techniques designed for margin trading. For example, we may see real-time risk analytics tools that can monitor market conditions and automatically adjust margin trading strategies to manage your exposure and protect you against losses.
Increased Cross-Market and Cross-Asset Trading
Margin trading may also increase the implementation of cross-market and cross-asset strategies to hedge risks. For example, you could use the MTF facility to purchase a stock with a positive beta and a stock with a negative beta. This would allow you to stay protected from losses, irrespective of how the market moves.
Or, you could trade in both stocks and gold, both of which have historically had an inverse relationship with each other. In addition to increasing retail participation in the stock market, margin trading could also indirectly enhance liquidity in other markets and assets as well.
More Flexible Margin Trading Terms
As more investors warm up to trading on margin money, the competition among stockbrokers will inevitably heat up. The intense competition could potentially lead to brokers offering margin trading facilities at more attractive terms, which can be hugely beneficial for traders.
Currently, some brokers offer MTF only on certain stocks, whereas others have strict holding period limits. The interest rates also vary significantly depending on the broker you choose. However, with more investors choosing to opt for margin trading, standardisation of terms across brokers is also a real possibility.
Enjoy a Feature-Rich Margin Trading Experience with Samco Securities
If you wish to take up margin trading, the MTF CashPlus feature of Samco Securities can help you maximise your return generation potential. With this facility, you can get up to 4X margin funding, meaning that you can purchase stocks worth Rs. 40,000 by just depositing Rs. 10,000 as margin money.
Furthermore, the CashPlus feature is available for over 1,000 stocks with no limits on the holding period. This effectively means that you can hold onto your investments even for the long term without worrying about automatic square-offs.
Samco Securities also offers a dedicated CashPlus margin calculator that instantly lets you know just how much leverage you can avail of. All you need to do is enter the margin money you’re willing to deposit and the current market price of the stock. As soon as you enter the details, the tool determines the leverage you can get and the quantity of stock you can purchase.
What’s more, the MTF CashPlus facility is available for all online trading account holders of Samco for life on the payment of just Rs. 1. So, what are you waiting for? Open a demat account with Samco Securities today and get access to an unparalleled and feature-rich margin trading experience.
Conclusion
The sharp increase in margin funding is proof that retail investors are gravitating towards MTF. The increased participation is likely to bring in several changes, innovations and regulatory involvement in the near future.
Therefore, if you’re planning to use the margin trading facility, staying informed of the various trends and innovations as and when they occur is crucial. Doing so can help you make more informed trading decisions without taking on too much risk.
Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847
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