Margin in Stock Market - What is it?

Margin in the stock market means borrowing funds from a broker to buy more shares than you could with just your own cash. In India, this idea has become more visible as more and more traders use margin trading facilities (MTF) for delivery-based equity trades in Group-1 securities as classified by exchanges like NSE and BSE. In this blog, let’s understand MTF in detail.

Understanding Margin in the Stock Market

Margin in stock market means the funds a trader borrows from a brokerage firm to buy shares. Instead of paying the full position value of the shares, you only need to pay a part of it, called the margin amount, while the broker lends you the rest.

Some of the stocks on which BSE allows margin trading include:

Click here for a detailed list.

MTF is useful because it increases your purchasing power through a process called leverage, which allows you to trade a larger position than you could with just your own funds. However, margin also comes with risks because both profits and losses are amplified.

What is Leverage in Margin Trading?

Leverage in margin trading refers to the ability to take larger trading positions by partially funding them with borrowed capital from your broker. This facility allows you to trade in SEBI-approved stocks using funds borrowed from a SEBI-registered broker, subject to strict margin and disclosure norms.

Suppose you have ₹10,000 and wish to trade a stock listed under SEBI’s MTF-approved list. If your broker permits a margin trading facility and the applicable margin requirement is 20%, you can take a position worth ₹50,000, using ₹10,000 of your own funds and ₹40,000 borrowed from the broker.

If the stock rises 5%, your holding becomes ₹52,500. After repaying ₹40,000 (along with interest), you are left with ₹12,500, yielding a 25% return on your capital. If the stock falls 5%, your holding drops to ₹47,500. After repaying ₹40,000 (along with interest), you are left with ₹7,500, resulting in a 25% loss.

Bonus Fact: Dhan offers upto 5x leverage on 1,700+ stocks. Check out the stocks eligible for MTF here.

Different types of Margin

The two common types of margin that apply to delivery-based equity trades are:

VaR Margin

Value at Risk (VaR) margin is calculated using scrip-wise daily volatility via an exponentially weighted moving average. NSE classifies securities into three groups, applying VaR rates from 9% to 75% based on trading frequency and volatility. It is calculated daily and collected on net client positions.

Extreme Loss Margin

Extreme Loss Margin (ELM) is a risk control measure levied in addition to VaR margin. It covers extreme market fluctuations beyond the normal range. ELM is set at 3.5% of the trade value for most equity securities and 2% for ETFs.

Mark-to-market

Brokers collect mark-to-market margin to cover potential losses arising from daily price fluctuations between the time of trade execution and settlement. These are calculated daily and paid by the T and T+1 day.

Common risks in Margin Trading

Margin trading involves the following risks:

Volatility Risk

Stock markets fluctuate sharply because of economic data, earnings announcements, or global events. When you trade on margin, these market swings can result in a sudden dip; even a few percentage points can push your account value below the broker’s maintenance margin.

Interest costs

Borrowed funds in margin trading are not free; brokers charge daily interest on the borrowed amount. These costs accumulate over time and reduce potential profits. Even if your stock does not lose value, high interest expenses can make the trade unprofitable.

Liquidity risk

Margin trading can expose you to liquidity problems when the position cannot be sold quickly at fair prices. Thinly traded stocks often have wide bid-ask spreads, meaning you may need to sell at a much lower price during a decline. In extreme cases, you may not exit the position before the broker liquidates it at distressed prices.

3 Mistakes to Avoid in Margin Trading

Here are 3 mistakes you must refrain from:

And it's a wrap

Margin in the stock market is a tool that lets you use borrowed funds (leverage) to increase your exposure beyond what your own capital permits. In India, SEBI has tightened rules recently: higher upfront margin, limits on leverage, and stricter monitoring through margins like VaR & ELM. 

While margin offers potential for greater returns, it brings proportional risk. Always use it with discipline, proper research, and stop-loss strategies to avoid costly mistakes.