Can investors benefit from BNPL strategy for stocks?

Margin trading facility allows equity investors to buy and sell stocks, but the risks are high

- Sashind Ningthoukhongjam

Buy now, pay later is a concept pioneered by e-commerce platforms like Amazon and Flipkart in recent years to attract more consumers. The two firms allowed shoppers the option to immediately buy a product and pay for it later. But the concept is nothing new for retail equity investors, who were allowed to buy stocks and hold them for a temporary period before selling them, possibly at a higher price. However, the so-called margin trading facility (MTF)—which has been in existence since 2004—is fraught with risks. Investors, who bet on stock price movement ranging from days to months, can benefit from this facility provided the stock prices trade higher than the buying price at the time of selling them

Through this facility, investors can put up a small upfront amount called an ‘initial margin’ and take exposure worth multiples of that amount. For instance, let’s say you have ₹25,000 as cash with your broker and want to buy shares of a particular company, say, Maruti Suzuki India Ltd. In a normal delivery trade, you can exchange your cash for a proportionate amount of Maruti’s shares. But using MTF, investors can increase their bet size with just a fraction of the amount.

Here’s how it works. Let’s assume the Maruti stock has a leverage of 4x. What this means is that if you deposit ₹25,000 (as the margin amount), the broker will lend you another ₹75,000. That way, your total exposure becomes ₹1 lakh.

To be sure, different stocks have different margin requirements specified by the stock exchanges. Investors have to put in the specified margin amount based on the stock they want to buy. However, brokers are allowed to charge more than what the exchanges specify as the margin. This margin requirement is a function of the liquidity and volatility of the underlying stock.