India’s margin trading market has hit ₹1 trillion, highlighting a surge in leveraged stock buying even as risks loom large for retail investors.
Data from the National Stock Exchange shows total outstanding funded stock positions across brokers have surpassed ₹1 trillion, reflecting how aggressively investors have embraced leveraged stock buying in recent years.
The pitch is tempting: put in a fraction of the money, borrow the rest from your broker, and take a larger position in a stock you are bullish on. But the mechanics of margin trading facilities (MTF) carry risks that are easy to underestimate.
How it works
MTF lets investors buy stocks by paying only part of the total transaction value upfront. Brokers fund the rest and charge interest on the borrowed amount, typically calculated daily.
The upfront portion, called the initial margin, can be met with cash or by pledging shares already held in a demat account. The broker then credits the balance required to complete the purchase. Investors effectively own the shares, but the position carries an interest cost for as long as it is held.
Not every stock is eligible. Only securities classified as Group I by the exchanges—around 1,000 currently—can be bought or pledged under MTF. These are liquid stocks that have traded on at least 80% of days in the past six months. Maximum lending varies by investor, stock, and broker risk policies. Access requires explicit opt-in through a broker’s platform.
Leverage and costs
The Scurities and Exchange Board of India’s rules require investors to provide 25-50% of the total purchase value as the initial margin, yielding 2-4x leverage. So, for a ₹1 lakh position, an investor contributes ₹25,000- ₹50,000, with the broker funding the rest.
Interest rates on the borrowed amount range from 9% to 18% per annum, depending on the broker. Some brokers also charge a pledging and unpledging fee when existing stock holdings are used as collateral.
When you pledge existing shares as collateral, the broker does not count their full market value. It applies a haircut — a percentage deduction that accounts for the risk of the pledged stock losing value. A blue-chip stock might carry a haircut of 15%, meaning shares worth ₹1,00,000 in your demat account will count as only ₹85,000 towards your margin. Mid-cap and small-cap stocks attract steeper haircuts, often 30-50%, reflecting their higher volatility and lower liquidity. The higher the haircut, the less borrowing capacity your pledged shares unlock.
On top of this, the usual brokerage charges and securities transaction tax (STT) apply when shares are bought or sold.
The holding period matters significantly when it comes to interest costs. At 15% per annum, interest compounds to roughly 2.5% over 60 days. The longer the position is open, the higher the interest drag on returns.
Brokerage structures further affect costs.
“When it comes to MTF, if the brokerage is not capped and percentage-linked it can add to the costs of MTF,” said Mohit Mehra, vice-president, primary markets and payments at Zerodha.
For MTF transactions, Zerodha charges 0.3% or ₹20, whichever is lower, while Angel One charges 0.1% or ₹20, whichever is lower. Both structures cap the brokerage on MTF transactions.
Consider the case of different brokers on an MTF position worth ₹10 lakh, both charging 14.6% per annum (0.04% per day) on borrowed funds. Assuming ₹5 lakh is borrowed over 30 days, both clock the same ₹6,000 in interest. But the brokerage tells a different story.
A broker that caps brokerage at ₹20 per order charges just ₹40 across the buy and sell legs — bringing the total cost to ₹6,040. A broker charging 0.20% per order with no cap adds ₹4,000 in brokerage, taking the total to ₹10,000. The interest rate alone does not tell you the full story, the brokerage structure on MTF transactions can further widen the gap.
The upside—and the downside
Leverage amplifies both gains and losses.
An investor with ₹20,000 can buy 40 shares outright at ₹500 each. Using MTF to borrow ₹60,000, they could buy 160 shares. If the stock rises to ₹550 in 60 days, they can sell for ₹88,000. After repaying the ₹60,000 borrowed and approximately ₹1,500 in interest (assuming 15% interest rate p.a.), net profit works out to be ₹6,500, a 32.5% on capital. Without leverage, the same 10% price move would have earned exactly 10%.
If the stock falls to ₹450, the same 160 shares fetch only ₹72,000 on sale. After the broker recovers the borrowed amount and interest, the investor is left with ₹10,500 — a loss of ₹9,500, or nearly 47.5% of the original ₹20,000. An investor who had bought only 40 shares outright would have lost exactly 10%. The losses can get amplified even more sharply than the gains.
“There are both pros and cons of availing the MTF. 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 can magnify losses due to leverage. The risks can be higher especially when markets are extremely volatile,” said Deepak Jasani, an independent market expert.
Margin call
MTF positions are monitored continuously. If the value of a funded stock drops below a threshold, the broker issues a margin call, requiring the investor to either deposit more cash or pledge additional shares to restore the margin cover. If the investor cannot meet the call in time, the broker steps in and sells the funded holdings to recover what is owed.
A severe single-session fall — 40% or more — may even push the account into a negative balance before the investor even has a chance to respond. In that situation, the broker can move beyond the MTF position and liquidate the shares the investor had pledged as collateral.
What started as a leveraged bet on one stock can end with the investor losing holdings they had no intention of selling. Such scenarios are rare, but not implausible — particularly in volatile or thinly traded stocks.
Closing an MTF position
Funded holdings continue to accrue interest until they are sold or the position is squared off. Some brokers allow positions to remain open indefinitely; others set a maximum holding period of 60 days or one year. Investors should check the terms before opting in.
When shares are sold, the broker deducts all outstanding interest, pledging fees, and brokerage costs, and credits the net balance to the investor’s account. The amount can then be transferred to a linked bank account.
What should investors do
Leveraged investing works well when stock prices move in the right direction and fast enough to outpace the interest cost. When they don’t, losses can permanently dent a portfolio.
Long-term investors have the most to lose from MTF. Interest costs compound over time, while equity markets can take months — even years — to recover from corrections. For new investors in particular, leveraged investing can be especially risky, with the potential not just for losses, but even the forced liquidation of long-held shares. New investors should also be mindful of platform design, nudges or promotions, which may push them to use features like MTF.
For those short on capital but seeking long-term wealth, mutual funds via systematic investment plans (SIPs) remain a disciplined, lower-risk alternative.