To be sure, most brokers in India offer a margin trading facility (MTF), positioning it as a “buy now, pay later” option. In this option, investors can use brokers’ funds to buy more stocks if they don’t have adequate capital.
Zerodha, the country’s largest broker in terms of active clients, was among the latest brokers to launch the facility. “…I haven’t been sure about this product for a long time because of obvious reasons. Customers who trade for delivery tend to ignore the impact of the cost of borrowing, and there’s always the risk of the trade going against them, which leads to a bigger loss…,” Zerodha co-founder Nithin Kamath wrote on X in December 2024.
The MTF book stood at over ₹72,634 crore as of 20 February 2025, showed National Stock Exchange of India Ltd data.
While the Securities and Exchange Board of India (Sebi) has laid down a regulatory framework for the MTF, new and first-time investors should avoid leveraged investing.
How does it work?
The margin trading facility lets you buy shares with just a fraction of the cost upfront while your broker covers the rest and charges interest on the borrowed sum.
It works by requiring the investor to pay an initial margin—in the form of cash or pledged shares—and borrow the rest from the broker.
Only stocks classified as ‘Group I securities’ are eligible for the facility. You can only borrow funds to buy these shares and only use these shares as collateral if you pledge existing shares.
Group I securities are liquid stocks that have traded at least 80% of the days in the previous six months. The maximum funding an investor can borrow against a particular stock depends on the initial margin requirements laid down by the stock exchanges, per various Sebi circulars.
There are 1,000-odd stocks available under the facility. To manage risks, brokers have certain internal limits at the investor level.
“The limit given by a broker to its clients varies. Liquidity in the scrip, market capitalization, internal risk management policy, and VaR margin of the stock, along with the broker’s financial strength, determines the maximum limits a broker provides to its clients. In terms of range, it varies from ₹25 lakh to 30 lakh to a few crore,” said Jay Prakash Gupta, founder of Dhan, an online stock trading and investment platform.
The investor must opt-in for the facility on the broker’s website to access it.
What are the risks?
The margin trading facility allows investors to buy more shares despite inadequate capital. If the investment works in their favour, then it can magnify their potential profits. But on the downside, it can also magnify their losses. Let’s look at both the scenarios.
An investor sees an opportunity in the stock of XYZ Ltd, trading at ₹1,000. With ₹10,000 in their account, they can buy only 10 shares, but by borrowing an additional ₹30,000 through the facility at 14% interest, they can buy 40 shares. After 60 days, the price rises to ₹1,100. The investor sells the 40 shares for ₹44,000. After accounting for the initial investment, borrowed funds, and interest, the profit is ₹3,310, or 33% on the initial ₹10,000 investment.
Note that the interest is calculated on a daily basis, which means the 14% per annum interest is 0.038% daily or 2.3% over 60 days.
But what if the stock price falls? In this case, selling at ₹900 yields ₹36,000, resulting in a loss of ₹4,690, or 46.9% on the initial investment. In contrast, had the investor only bought 10 shares outright, the loss would have been limited to 10%.
Is there a risk of losing shares?
If the stock bought under the facility falls significantly, the broker can ask the investor to increase the margin cover. If the investor fails to do so, the broker has the right to use the MTF stocks to restore the margin cover.
In extreme market conditions, the investor can even lose the shares pledged as collateral, while chances of this are rare.
For example, if the stock of XYZ Ltd. sees a sharp 40% fall in a single day, the investor’s account would have a negative ledger balance, and the broker would require the investor to bring in additional margin immediately or sell pledged shares for the recovery.
“There are both pros and cons of availing the MTF. But investors should not ignore the risks and only opt for the MTF if they have the capacity to withstand the potential risks on the downside, which compound the losses,” cautioned Amar Deo Singh, senior vice president-research, Angel One.
What are the initial margin requirements?
The initial margin requirements are calculated by combining various statistical measures laid down by the exchanges. The value at risk (VaR) margin is the potential loss margin required upfront. Extreme loss margin (ELM) is the additional margin needed over and above the VAR. And then there is ad hoc margin, which is nothing but temporary margin requirements imposed by exchanges during periods of heightened market volatility or due to certain stock-level surveillance measures.
The Securities and Exchange Board of India (Sebi) has established guidelines for the minimum requirements.
Brokers can also stipulate higher margins. As things stand, an investor needs to put in at least 25-50% initial margin (through cash or existing stock holdings), translating into leverage of 2-4X against her initial margin. So, the investor can typically get funded for anywhere between 50% or 75% of the total value of the shares she wishes to purchase.
Are there any other costs?
The investor pays an interest rate of 9% to 18% per annum, depending on the broker. There are other costs as well. For example, certain brokers charge a pledging and unpledging fee. This is only applicable when existing stock holdings are used to avail of the margin trading facility.
In addition, there are regular brokerage costs and securities transaction tax (STT) when the stock is bought or sold.
How to close MTF?
The stock bought through the facility is essentially a funded stock. Such holdings incur interest as long as they are maintained. However, brokers offer different terms and conditions. Some brokers allow the facility to continue indefinitely, while some may offer shorter timeframes—60 days or one year.
If the investor sells these holdings, the broker will adjust for interest and other costs and credit the remaining balance to the investor’s broking account. The investor can transfer the amount to her bank account online.
If the broker is forced to sell these holdings fully or partially in case of a shortfall in margin, then again the broker will adjust for all the costs and credit the remaining balance to the investor’s broking account.
Investors can cover the margin call by either adding more stocks to maintain the initial margin requirements or adding more cash to the broking account. A fall in the value of pledged shares would also trigger additional margin requirements if it breaches minimum initial margin thresholds.
Takeaways
Using leverage to buy shares can be highly risky if the stock price starts to correct. Also, there is an interest cost involved. The longer one holds one’s position, the higher the interest cost. So, long-term investors should avoid leveraged investing. Instead, they can build their equity portfolio gradually with staggered investments.
If you are a first-time investor, it is advisable to avoid direct stock investing. Start building your investment portfolio through a diversified equity mutual fund. Margin calls can also potentially create heavy selling pressure during volatile markets, especially in stocks with high MTF exposure, if they suddenly lose investors’ favour.
Traditional and underfunded brokers can also face heavy losses in their books if they have concentrated MTF exposure to a single stock and selling pressure intensifies due to several margin calls.
