ICICI Direct margin trading facility (MTF) is very useful when you are short of cash but still want to buy stocks in large quantities or trade big for short term gains.
Stock trading is the technique of making money through buying and selling stocks. To make decent profits from trading opportunities, you need enough capital to trade. Putting small capital in trading keeps your risk lower but the profits made are also small. Sometimes, you may find more than one stocks to trade but the money in your trading account is small.
How to deal with such situations? Margin trading is the answer to this problem. Margin means borrowed money for stock trading. Stock brokers lend money to a margin account holder to buy more stocks with the limited cash available. It is like leverage trading stocks.
Understanding margin trading is important for you as a trader. This is because margin is not only limited to buying securities on margin but it is also necessary for short selling of stocks. It allows you to make money in falling markets by shorting a stock in intraday trading. You can not short a stock in delivery trading. You need a margin trading account to get margin. You can get it activated easily alongside your delivery trading account by signing some documents.
Earlier, margin trading facility was available to day traders only. However, now buying on margin is available to swing traders as well as positional traders also. However, short selling trade is not applicable for these traders.
Several leading brokers provide this margin trading facility but I will be talking about the ICICI Direct margin trading facility here. They provide two modes of buying stock on margin. You can use any mode depending upon your trading purpose.
Types of Margin Trading
You can use margin trading for intraday trading, swing trading or positional trading.
In intraday trading, the trading position created is closed or squared off before the end of the same trading session. In a swing trade and positional trade, the trading position is carried forward to next trading sessions.
I use ICICIDirect Trading Account. They provide two options for margin trading depending upon the time horizon of the trade taken :-
Broker Mode Margin Trading
With broker mode margin trading, you can trade for intraday only. Your position will be closed automatically 15 minutes before the market close at the last traded price at that time even if you do not close your position.
In intraday trading with margin, you can get margin or loan by paying only 5% as the initial margin. With margin money of ₹ 2000, you can trade for upto ₹ 100,000 with icici direct intraday trading. You can use margin plus trading facility to create even more limit. ICICI margin plus is different from margin trading based on using stop loss simultaneously while placing your order. Stop loss is must in margin plus.
In intraday trading, the profits are earned with small moves in stock prices. The trading position is closed quickly to avoid losses due to high volatility in stock prices. With margin trading, these small profits get multiplied to big profits.
Advantage with broker mode margin trading is that it allows you trade the stocks both ways; for upside or downside.
That means, you can buy a stock first in expectation of price rise and close at higher price with profits.
If you expect a fall in a stock price, you can first sell the stocks and later on buy back at lower price with difference in prices being your profit. This is called Short Selling.
With broker mode trading, the trading position needs to be closed before the session of trading for that day ends. If not done by the client or the trader, the trading position is closed automatically. This is done by the broker or the system 15 minutes before the market closes.
Client Mode Margin Trading
Client mode margin trading is ideal for positional trades. It is now called as MTF or margin trading facility. It is very useful when you expect your price targets to be met in next few days or weeks or months.
The client herself/himself can decide when to exit the trade. However, the position can not be kept for unlimited time. There is a time limitation of up to 365 days.
The catch here is that you will have to pay the margin trading interest rates for the amount you borrowed from the stock broker and time period you hold your position. Margin rates are around 0.5% per month for both the national exchanges, NSE as well as BSE.
Client mode margin trading allows you only buying on margin. It does not allow short selling as with broker mode.
On the second day of holding, these stocks are seen as Pending for Delivery in your trading accounts.
The above image shows a trading position in client mode which is now Pending for Delivery.
It is for Dabur (DABIND) stock, 1000 stocks showing Initial Margin, Minimum Margin which is the maintenance margin, Available Margin, additional margin required as the margin requirements.
You can keep them as Pending for Delivery if you are purely a trader. You can also convert these stocks to delivery if you have changed your mind later on to stay invested in that stocks.
You would need to pay the pending amount if you want to convert it to delivery. The stocks will be shifted to your demat account.
Another thing to keep in mind is the brokerage charges. In case of client mode trading, you are charged with the same rates as with delivery trading.
Brokerage rates are much higher for delivery trading as compared to margin trading. Whereas for margin trading, the usual brokerage rates are around 0.05%, for delivery, they are around 0.5%.
Brokerages are different for different brokers. ICICI margin brokerage rates are different for different plans.
|I-Secure Plan||Above ₹20 cr > 0.030%|
|(Based on Turnover in crores – Monthly)||₹10 cr – ₹20 cr > 0.035%|
|₹ 5 cr – ₹10 cr > 0.040%|
|Less Than ₹5 cr > 0.050%|
|Irrespective of Turnover – Pre-Paid Yearly Plans (Excluding GST)|
|Prime 900 Plan||0.025%|
|Prime 4500 Plan||0.018%|
|Prime 9500 Plan||0.015%|
ICICIdirect has stopped using the terms broker mode and client mode recently. The later is now called as margin trading facility (MTF) while the former is simply intraday margin trading,
Margin Trading vs Delivery Trading
With cash trading or cash buying, you can buy the stocks only up to value of your cash holding.
Suppose you have ₹ 1,00,000 capital in your savings account. You want to buy a stock XYZ which is trading at a market price of ₹ 400 per share.
With cash buying, you can buy only 250 shares with that money. Your trade value would be 250X400=₹1,00,000. You would need to pay brokerage of ₹ 500 (assuming brokerage rate of 0.5%).
Suppose the stock prices move higher by 5% in near future. The share price of this stock would be now ₹ 420.
With that trade you end up making a profit of 250 X 20 = ₹5000. Your net gain would be 5000 – 500 = ₹ 4500 or 4.5% of your capital.
With margin trading, you have two options as we talked above; broker mode and client mode.
With the broker mode in intraday trading, you can buy nearly 5000 stocks on margin. With the client mode, you can by nearly 3 times the stocks or 750.
We go with the client mode stock margin trading. Now your trade value would be 750 X 400 = ₹3,00,000. The brokerage paid would be ₹1500 (with same rate as above).
If you expect the price to hit the target in a week or so, you can simply buy 750 shares in margin. When your targets are met, you now make a handsome profit of 750 X 20 = 15000.
The net gain would be 15000 – 1500 = ₹13500 or 13.5% (inclusive of interest charges which needs to be deducted from the net gains accordingly). It is 3 times of the profit you would have made with cash trading.
ICICI Direct margin trading facility is very good if you are short of cash at any time with a trading opportunity knocking at your door. I use it regularly for my trading. You can also use ICICI direct options selling margin facility for options trading. This is popular as option plus product.
What about you? Do you use margin trading routinely? Which broker do you use?