Definition : Margin trading is a practice of buying stocks with borrowed money. It is essentially a leveraging mechanism enabling investors to take market exposure much above than what is possible with their own resources.
Explanation : Margin trading means buying and selling stocks using money borrowed from your broker. In order to carry out margin trading, you need a margin account. A trader who buys stocks on the loan provided by the broker can keep the loan for as long as the interest is paid on this loan. While this may sound a convenient way to invest, it has its share of risks. For instance if the trader loses money on a stock, he needs to pay up the entire sum (principal which you borrowed) along with interest.
SEBI prescribes eligibility conditions and procedural details for allowing the Margin Trading Facility. Only brokerage houses with a net worth of a minimum of Rs 3 crore can offer margin accounts. Margin trading is possible in select stocks, which usually enjoy significant trading volumes. Group 1 securities, initial public offers and securities which meet the conditions for inclusion in the derivatives segment of the stock exchanges are available for margin trading. To provide this facility, the broker may use his own funds from internal accruals or borrow from scheduled commercial banks or NBFCs regulated by the RBI. The “total exposure” of the broker towards the margin trading facility should not exceed the borrowed funds and 50 per cent of his “net worth”. While providing the margin trading facility, the broker has to ensure that the exposure to a single client does not exceed 10 per cent of the “total exposure” of the broker. Initial margin has been prescribed as 50% and the maintenance margin has been prescribed as 40%.In addition, a broker has to disclose to the stock exchange details on gross exposure including name of the client, unique identification number under the SEBI (Central Database of Market Participants) Regulations, 2003, and name of the scrip. If the broker has borrowed funds for the purpose of providing margin trading facility, the name of the lender and amount borrowed should be disclosed latest by the next day.