A demat account is a safe place for all your financial instruments. It is a necessary account required to take delivery of financial securities electronically in one place. However, a demat account is not mandatory if a trader wants to do intraday trading. In that case, a trading account is sufficient.
A trading account has two types: a cash and margin trading account.
Cash Trading Account
In a cash trading account, you need to deposit the whole amount required to buy securities.
For example, say if you want to buy 100 shares of company ‘A’ at Rs 100. Then, you will require a total capital of Rs 10,000/ in your trading account.
Margin Trading Account
It is the opposite of a cash trading account. In a margin trading account you do not have to deposit the entire capital required. Instead, to place a margin trade, you need to deposit a fraction of the amount and the rest is borrowed from the broker.
For instance, your broker ‘xyz’ gives 20 times margin/per trade. So, if you want to buy shares worth Rs 1,00,000. Then, you will have to deposit only Rs 5000 and the remaining balance will be paid by the broker. That is Rs 95,000 will be paid by the broker.
How To Open A Margin Account?
A margin account opening is similar to a demat account opening. The steps are as follows:
Step 1: Application Form
You need to contact a broker for the margin account opening form. Once you have filled the form, submit it back to the broker.
Step 2: Submit Documents
If you have already opened a demat or trading account with the same broker, then you might not be required to submit the documents again. However, if not, then you will have to submit the following documents:
- Address Proof
- Identity Proof
- Other KYC documents
- Income statement/ ITR
- Bank account details
Step 3: E-sign ‘Rights and Obligation’ document
After submitting the documents, the broker will verify them. Post successful verification, you will receive a ‘rights and obligation’ document. It is a common binding agreement between a beneficiary and the depository participant.
Step 4: Log in to the trading portal
After signing the ‘rights and obligation’ document, the broker will Email you the credentials to log in on the trading portal. You can begin your trading journey, after logging in to the trading portal.
Eligibility For Margin Trading
It is necessary to have a margin account to avail Margin Trading Facility (MTF) from the broker. You need to pay a certain fee to open a margin trading account. Along with the fee, you are required to maintain the account with a minimum balance. In case, there is a shortfall in the balance amount, the broker has the right to square off your trade/position in order to fund the margin account.
Benefits Of Margin Trading
- Margin Trading is beneficial for those traders who are confident about their trading strategy but do not have enough cash to perform the trade, hence they can make a margin call and pay back the amount after earning profit.
- You can keep your portfolio as a security or collateral and take leverage, to trade in the market.
- Along with enhancing the purchasing power it also increases the return on investment.
- Margin Trading Facility is regulated by the Securities Exchange Board of India (SEBI) and watched by the exchanges.
Is Margin Trading Good or Bad?
Well, it is a debatable topic. However, to understand this, we need to look at both sides.
The significant advantage of trading with a margin is that the profit can be magnified with a minimum amount of capital.
On the other hand, if any trade goes wrong, the margin facility can also amplify the losses.
Bottom Line
Margin trading is a very risky option. Therefore, MTF should be used only by experienced traders, who trade considering the risk appetite, and can take a hit on the capital invested.
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