Buying more than you can pay for
A margin trading facility, or MTF, lets you buy shares for delivery while paying only part of the price. The broker funds the rest, holds the shares as security, and charges interest every day you keep the position. It is a loan against the shares you are buying, regulated by SEBI and offered by most large brokers for a list of eligible stocks.
The pitch is simple: ₹1 lakh can buy ₹4 lakh of shares. The cost is less obvious, because it is quoted per day and taken in small amounts. This post works out both sides with one example. The rates and margins below are illustrative; each broker sets its own interest rate, and the margin you must put up varies by stock and changes with its volatility.
The example
You have ₹1 lakh. The broker requires you to fund 25% of the purchase and lends the other 75%. You buy ₹4 lakh of one share.
The margin calculator shows the basic arithmetic: at a 25% margin, a ₹4 lakh position needs ₹1 lakh of your capital and carries 4× leverage. The ₹3 lakh balance is the loan. Assume the broker charges 15% a year on it, which is about 0.041% a day.
What the interest costs
| Holding period | Interest on ₹3 lakh | As % of the ₹4 lakh position | As % of your ₹1 lakh |
|---|---|---|---|
| 1 day | ₹123 | 0.03% | 0.12% |
| 30 days | ₹3,699 | 0.92% | 3.7% |
| 90 days | ₹11,096 | 2.77% | 11.1% |
| 180 days | ₹22,192 | 5.55% | 22.2% |
| 1 year | ₹45,000 | 11.25% | 45.0% |
Read the last column. A year's interest is 45% of your own money. Interest runs whatever the share does, on holidays and weekends too, and it is the only part of the trade you know in advance.
The middle column is the hurdle. Before any charges, the share has to rise 11.25% a year just to pay the lender, because 75% of the position is borrowed at 15%. A share that returns 12% in a year, a respectable result, leaves you with 3% on your capital after interest. Holding the same share with your own ₹1 lakh would have earned 12%; the CAGR calculator turns any entry and exit price into that annual figure.
| Share's return over a year | On ₹1 lakh, no borrowing | On ₹1 lakh with MTF, after interest |
|---|---|---|
| +20% | +20% | +35% |
| +15% | +15% | +15% |
| +12% | +12% | +3% |
| +8% | +8% | -13% |
| 0% | 0% | -45% |
| -10% | -10% | -85% |
At 15% the two lines cross: borrowing only helps if the share beats the interest rate. Below it, leverage multiplies a modest gain into a loss. These figures are before charges and assume the share gets to its year-end level without a margin call on the way, which is the next problem.
How losses scale
Leverage works in both directions, and on the downside the interest makes it worse. Here is the same ₹4 lakh position held for 90 days, against ₹1 lakh held in cash. Both include interest (for MTF) and the statutory charges at the brokerage calculator's rates, with zero brokerage.
| Share's move over 90 days | MTF profit or loss | On your ₹1 lakh | Cash profit or loss | On your ₹1 lakh |
|---|---|---|---|---|
| +20% | ₹67,916 | +67.9% | ₹19,741 | +19.7% |
| +10% | ₹27,957 | +28.0% | ₹9,752 | +9.8% |
| +5% | ₹7,978 | +8.0% | ₹4,757 | +4.8% |
| 0% | -₹12,001 | -12.0% | -₹238 | -0.2% |
| -5% | -₹31,980 | -32.0% | -₹5,233 | -5.2% |
| -10% | -₹51,960 | -52.0% | -₹10,227 | -10.2% |
| -20% | -₹91,918 | -91.9% | -₹20,217 | -20.2% |
| -25% | -₹1,11,897 | -111.9% | -₹25,212 | -25.2% |
A flat share costs you 12% in a quarter. A 10% fall, an ordinary quarter for many shares and small next to a typical maximum drawdown, costs more than half your money. A 25% fall costs more than all of it: the shares are worth ₹3 lakh, exactly the loan, and the interest and charges are owed on top.
Statutory charges are larger too, because they are levied on the ₹4 lakh you traded, not the ₹1 lakh you own: about ₹905 for the round trip against ₹238 in cash. Brokers also charge brokerage and a pledge fee on MTF trades. What trading actually costs itemises the rest.
The margin call comes first
In practice you rarely reach -25%. The broker requires your own stake to stay above a minimum share of the position's current value. Suppose that floor is 20%. Your stake is the position's value minus the ₹3 lakh loan, so it falls below 20% once the position drops under ₹3.75 lakh: a fall of just 6.25%.
At that point you must add money or the broker sells shares to bring the loan back in line, often at the worst moment. A share does not need to end lower for a leveraged position to lose; it only needs to dip on the way. That is why volatility matters more with borrowed money than without it, and why a high-beta share can force a sale in a fall it would later recover from.
Rules of thumb
- Compare the interest rate with a realistic return. If the rate is higher than what the share can reasonably earn, leverage lowers your expected result and widens the range of outcomes.
- Count interest as a daily cost. Multiply the daily rate by the funded amount and the days you expect to hold. A trade planned for a week that stretches to six months costs 26 times as much.
- Know the forced-sale level before you buy. Work out the fall that triggers a margin call. If it is within the share's normal monthly range, the position is too large.
- Don't average down on margin. Adding to a falling position with borrowed money combines both risks; see averaging down a stock.
Borrowing to invest is not unusual: it is what a home loan does, and prepay, refinance or invest weighs the same rate-against-return question for a mortgage. The difference is that a house is not marked to market every second, and the lender does not sell it after a 6% dip. For a wider look at what leverage does to retail traders in derivatives, see Day trading in India: career or gambling?. None of this is a recommendation to use or avoid MTF. It is the arithmetic to do first.
Frequently asked questions
How is interest charged on a margin trading facility?
Brokers charge interest daily on the amount they fund, not on the whole position, usually quoted as a percentage per day. At an illustrative 15% a year, ₹3 lakh of funding costs about ₹123 a day, ₹11,096 over 90 days and ₹45,000 over a year.
How much does a stock need to rise to cover MTF interest?
With 25% of your own money and 75% funded at an illustrative 15% a year, interest equals 11.25% of the position each year, so the stock must rise about 0.92% a month, 2.77% a quarter or 11.25% a year before charges just to break even.
Can you lose more than your money in margin trading?
Yes, in principle. At 4 times leverage, a 25% fall wipes out your own capital, and interest and charges come on top. In our example a 25% fall over 90 days costs about ₹1.12 lakh on ₹1 lakh of capital. Brokers ask for more margin or sell the shares well before that point.
This is commentary on published data, not investment advice. WealthTicker is not a SEBI-registered adviser or distributor. Figures are as of the dates stated and can be revised by their source.
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