Margin money is an important part of the trade when you trade on margin. It is how much money a trader puts in from his own pocket. Then the broker finances the rest of the trade.
This amount is kept as security for the broker. And it affects the size and cost of a trade as well. Anyone using a margin trading facility needs to understand how margin works before taking a position.”
What Is Margin Trading?
Margin money is the trader’s own contribution in a funded trade. The broker offers the balance on fixed terms.
The required amount may differ, depending on the stock, market rules and broker policy. It may also change when the risk levels are changing.
For MTF, NSE mentions that the eligible securities are Group I equity shares and units of Group I equity ETFs. Initial margin may be provided in the form of cash, cash equivalents or eligible Group I securities after haircut.
What Does Margin Money Work?
Consider a simple example:
A trader has to buy shares of Rs.1,00,000. Let’s say the broker asks you for margin money of ₹30,000. The balance of ₹70,000 is paid by the broker.
Now the trader has a position worth Rs 1 lakh. But he spent just Rs 30,000 from his own pocket.
If the share price drops the loss is based on the total trade value. The broker can also charge interest on the funded amount of 70000.
So margin is not just the cash paid in the beginning. Funding cost and price risk are also to be dealt with.
Things to Check Before Using Margin
1. Verify if the stock qualifies
Not all shares can be purchased thru a margin trading facility. Check MTF stock list of broker before placing order.
MTF allows Group I equity shares and eligible equity ETFs as per NSE rules.
2. Verify the margin amount
Find out how much money you must have accessible before the trade. The margin required can vary from stock to stock.
Don’t expect the margin to be the same for each trade.
3. Know the amount of funding
Check the broker funded part of the trade. That gives you a sense of how much of the capital used is borrowed.
It is also useful to check the interest cost.
4. Check interest and other fees
MTF funding is not free. The broker charges interest on the amount advanced.
Trading may also include broking, taxes, pledge charges and demat related charges. These costs should be built into the trade plan.
5. Watch the margin after the trade
Margin is not only needed at the time of opening a position.
NSE rules require open funded positions to be maintained at margins.” If the market value of the funded shares is less than the funded cost, mark-to-market margin may also be required.
This means that traders should monitor the share price as well as the margin available.
6. Understand what happens in a shortfall
If the shares lose value it can cause a shortfall in the margin. The broker might ask for cash or acceptable collateral.
The funded position should be provided with the required margin as per the stated terms, otherwise it will be reduced or closed. Bajaj Broking also states that if the margin requirements are not met, the position may be liquidated.
Where does Bajaj Broking fit in
Bajaj Broking provides margin trading facility for eligible equity trades. It has MTF section for clients to track funded stocks, margin used, available balance and interest charged.
Its platform also explains MTF stocks, funding terms, interest rates, and the process of pledging. Traders who want to track their MTF position and funding data together in a single account view, Bajaj Broking can be considered for this purpose.
Always check terms, rates, stock eligibility and charges before each trade.
Key Risks to Understand
Margin trading is the use of borrowed money. This means that if prices move against the position, the trader’s own margin can be eroded by losses.
Interest may also add to the trade cost while the funded position is open. Traders should therefore have a clear exit level and funds ready for margin calls.
Your money for daily and short term needs should be segregated from your trading money.
Conclusion
Margin Money is the trader’s own contribution to a funded trade. It affects how much broker funding can be used and how the position has to be managed.
Please make sure that you have understood the risks involved and the terms and conditions before availing of the margin trading facility. These checks can help make the cost and risk of an MTF trade more transparent.
