For instance: If an investor wishes to buy 100 shares of an X scrip trading at Rs 200, he can opt for the margin trading route, wherein the transaction would be partly funded by the trader (margin money) and partly by the broker (borrowed funds).
Margin trading proves to be a leverage mechanism for investors as they are allowed to perform trading with margin money. From the investor's stance, margin trading provides comparably larger exposure with a relatively smaller margin amount. In this way, chances of realizing higher profits or losses is increased.
SEBI specified guidelines for facilitating margin trading facility for corporate brokers
For a corporate broker to provide margin trading facility to its clientele, minimum net worth requirement is Rs 3 crore. Further, for such a facility, the broker member and the client are required to sign an agreement in a form specified by SEBI for the purpose. While extending margin trading facility to traders, the broker is allowed to use only his funds or avail financing facility from NBFC's or scheduled commercial banks.
Also, as per the guidelines of SEBI for margin trading, clients cannot avail the facility from more than one broker at one point in time.
Margin trading: Enhances efficacy of the overall securities market:
The margin trading strategy assists in smooth price discovery mechanism of securities and offers liquidity. This form of trading that is executed both ways that is from the buyer and seller end results in an increase in demand as well as supply of securities and funds. Eventually, because of increase in such forces, margin trading provides liquidity into the market. Also, this form of trading ascertains smooth price discovery mechanism of securities.