Last Updated on March 19, 2024 by ethinos
Margin trading is a trading practice where you can trade using borrowed funds from your stock broker. You can get this loan by keeping your cash or securities as collateral. Additionally, you need to pay interest on this borrowed amount. In this blog, you will learn about the interest implications of margin trading.
Table of Content
What Is Margin Trading?
Margin trading is a trading facility where you can trade using borrowed funds by offering a small initial deposit called a margin. In other words, you are using securities you already own or cash balance as collateral and getting a loan against it. With the funds, you can enter into positions on stocks, commodities, currencies and indices.
As with any loan, the broker will charge interest at an agreed-upon rate on the loan. Margin trading allows you to create a large position by only paying a small portion of the transition value.
For example, you have Rs. 50,000 and your broker gives you Rs. 1,00,000 as a loan. Then you will be able to use Rs. 1,50,000 trading. In exchange, brokers charge an interest on the margin amount.
Interest Implications on Margin Trading
As you trade in financial markets using borrowed funds, you need to pay interest to the broker. The interest you need to pay for the margin trading facility is called the ‘margin trading interest rate’.
It is the cost of taking a loan from your broker for trading. The interest rate primarily depends on the risks the broker is taking for offering the loan. It also depends on your broker’s existing relationship with the trader and the particular security being traded.
Although you put your securities as collateral to take this loan, you need to pay interest and if you face any losses in your trades, your broker is not responsible for this.
Interest rate is a vital factor for your trades because it directly increases your trading costs. It can easily influence your profits or losses. So, you should have proper knowledge about the interest rate to be a smarter trader. This rate varies between different stock brokers and can go up to 24% per annum.
How Interest Rate on Margin Trading Is Calculated?
Brokers calculate the interest rate based on the loan amount and how many days you hold your MTF position. Brokers will count your interest daily and it will include both working and non-working days.
The calculation is very simple. To move forward with the calculation, you need to know the following information:
- Total margin amount given by your broker as loan
- How many days do you want to hold your position using the MTF facility
- Rate of interest (%) charged by your broker
For example, if you take Rs. 1,00,000 as a margin from your broker at the interest rate of 15% per annum and you hold your positions for 15 days, your interest will be:
Interest = (Margin used x interest rate x number of days you hold your position) / 365
So in the above example, your interest calculation is:
Interest = ( 1,00,000 x 12% x 15 ) / 365
= ( 1,00,000 x ( 12 / 100 ) x 15 ) / 365
= Rs. 493.15 (approx)
So, you have to pay Rs. 493.15 against your MTF position.
What Are the Additional Charges of Margin Trading?
Besides the interest, there are other charges that you need to pay for margin trading. You should know these charges as they directly influence your net profits. Here are some of them:
Account Opening Charges
As you can not use the MTF facility from a normal broking account, you need to open a margin account with your broker. Some brokers may charge you an account opening fee once to open your account with them.
Subscription Charges
Brokers offer you different subscriptions under your margin account and based on your package, you will get different benefits and features. You may choose the basic plans if you are a beginner in margin trading.
Trade Charges
For every executed order, brokers charge an additional fee and it depends on the type of asset you are making your position. However, you do not need to pay this fee for unexecuted orders.
Pledging Charges
If you use a margin pledge, you need to pay an additional fee for every pledging and unpledging of securities. It also depends on your broker and additional taxes are applicable on pledging charges.
Additional Read: Tips for Successful Margin Trading
Summing up
Margin trading and correct market analysis are a great combination for higher returns. However, you must be careful while using this facility as it can lead to huge losses. Additionally, you need to be aware of the charges applicable to margin trading. Too high charges can reduce your returns.
Bajaj Broking offers one of the lowest interest rates on MTF starting at 10.75% p.a. Open your free trading and demat account and get up to 4x leverage for margin trading.
Frequently Asked Questions:
MTF facility or margin trading funding facility is the way to take a loan from your broker to trade in different financial assets. You can use either your securities or cash balance to get this leverage.
Yes. Every broker takes interest when you trade on margin. However, the interest rate and other charges depend on the broker you have a margin account with.
If you lose your margin money, your broker can sell your MTF positions to recover the debt. Additionally, if you pledge securities to take a loan, your broker will also sell those assets to recover all the charges.
Yes. Brokers calculate your margin interest on a daily basis. You need to pay interest until you hold your MTF positions even if it is a non-working day.
