Using Margin Trading, you can get a loan from your stock broker to purchase shares. You can keep your holdings as collateral to use a margin trading funding facility from your broker. It helps to increase your profits. However, it may lead to a huge loss if your trading decision is wrong. In this blog, you will learn about the common mistakes you should avoid while using margin trading.
Table of Content
Overview of Margin Trading Funding
Margin trading or margin trading funding (MTF) is a facility provided by stock brokers where you can take short-term loans to purchase shares. One of the biggest advantages is you can use your holdings (shares, ETFs, SGBs, mutual funds, etc.,) or your trading account balance as collateral to get the loan.
For example, you have Rs. 1,00,000 to buy shares. You want to buy more shares but don’t have enough cash. In this case, you can offer an initial deposit of Rs. 1,00,000 as a margin. Then, the broker will give you Rs. 2,00,000 in additional funds to buy more shares.
For this example of margin trading, you will be able to purchase shares worth Rs. 3,00,000. However, your broker will charge you interest on this margin and the interest can go up to 24% per annum.
After 2017, SEBI allows investors to keep your securities as collateral. However, before this time, you could only use cash to get a margin.
Common Mistakes To Avoid
The Margin trading facility can help you to get higher returns from your trades. However, if your trading decisions are wrong, you may face huge losses. These are the common mistakes that you should avoid if you are using a margin trading facility:
- Overleveraging:
Overleveraging means taking a huge loan against your securities. This can lead to huge losses if you make mistakes in decision-making. Before taking leverage from your broker, it is very important to know your risk tolerance. Only borrow an amount that you can afford to lose without impacting your financial situation. Otherwise, you will lose your capital and your financial stability may be affected.
- No Stop-loss:
Stop loss is an exit point that you can set in your trades. If the price hits a stop loss, your broker will automatically square off your position. It helps you limit your losses if the market moves against your bets.
Not setting a stop loss is one of the most common mistakes for margin trading. Stop loss is very important you must set for your trades, especially in option trades as there are no upper and lower circuits of prices. A stop-loss will sell your positions automatically when it reaches your predetermined loss limit.
Additional Read: Margin Trading Tips & Strategies for Beginners
- Emotional Trades:
In any type of trading, emotion can easily lead you to make wrong decisions. You should be very careful to determine the correct market movements. In most cases, traders do unnecessary trades by following their emotions and face significant losses.
Emotional trading is the reason why many traders buy when the market is high and sell at low prices. Hence, it is best to keep your emotions aside while using margin trading.
- Ignoring News and Market Trends:
Ignoring news and market trends is another common mistake of margin traders. If you are not updated with the news or if you fail to catch the correct market trend, you will be at a massive disadvantage. To avoid this kind of mistake, it is very important to follow every news that affects market sentiment.
Adjusting your trading strategy in the direction of the market will help you to make profits consistently. Also, keep a note of upcoming news which previously affected market movements.
- Frequent Trading:
There are various charges that you have to pay to execute a trade. It is a common mistake of inexperienced traders to trade very frequently leading to higher brokerage and additional charges.
When you trade with your sentiment, it is quite natural to make losses. When you make more trades to recover those losses, you end up paying brokerage and other charges again and again. After a certain period, when you check your P/L statement you may see that most of your profits have been offset by trading charges.
Additional Read: Avoid These Common Mistakes in Online Stock Trading
Summing up
Margin trading is a great way to get more profits from trading. However, you should be very careful while placing a trade and you should avoid these common mistakes to become profitable. To use the margin trading funding (MTF) facility, you have a margin trading account with your broker as you cannot use this facility from a normal broking account.
Open your free demat and trading account today with Bajaj Broking and get up to 4x leverage for margin trading.
Frequently Asked Questions:
MTF or Margin Trading Funding is a facility where you can get a short-term loan from your broker to trade. You have to use either cash or securities as collateral to get a loan.
Margin call is a type of warning message that a broker sends to a margin trader if the maintenance margin goes below the safe level. When you receive such a message, you need to load cash into your trading account. Otherwise, your broker will sell your securities to repay debt after a certain period.
No. You cannot get an MTF facility in a normal broking account. To use this facility, you have to open/activate a margin account with your broker.
In margin trading, you have to pay interest on your borrowed amount. Additionally, there are charges for pledging and unpledging shares in addition to GST on them.
