“The goal of a successful trader is to make the best trade. The money is secondary.” -Alexander Elder.
Successful investors frequently develop distinguishing characteristics that set them apart from the pack. Making money on the stock market is simple if you have the knowledge and prepare wisely. You may even seek guidance from experts about the share market. However, you may not always have enough funds to purchase the desired stock. Well, that is when margin trading comes into play.
Let us take an example. Suppose you wish to purchase five shares that will cost you around 5 lakh Indian rupees. What if I tell you that you may buy the stocks even if you have only one lakh in hand?
Yes, you read it right, and the secret behind this is margin trading. Let us quickly understand the basics of margin trading and discuss how it works.
Understanding Margin and Margin Trading
Did you know that a mere deposit can engage in financial market speculation? It is known as margin trading and can stretch your finances even further.
The margin in finance refers to the capital deposit with a broker in exchange for the credit risk. Here, credit risk means the possibility of loss due to any circumstances. Buying on margin occurs when an investor purchases an asset while borrowing the remaining balance from a broker.
The first payment to the broker for the asset is known as buying on margin; the investor utilizes the marginal assets in their brokerage account as security.
It is crucial to remember that often margin trading is done for transactions that last no longer than a trading day. Additionally, many reputable brokers offer the service of financing investors. Technically, margin trading refers to the simultaneous purchase and selling of stocks. However, brokers have recently loosened the time requirements for squaring off contracts to boost trading volume. An investor must make an informed judgment about the stock movement in a session.
What is the process of margin trading?
The procedure is simple to comprehend. A margin account provides you with the money to buy the desired stocks as a broker grants you a loan. Brokers hold the acquired shares as collateral and provide you with the opportunity to trade on the margin.
The procedure begins with a request for your broker to create a margin account. This service initiates with a marginal upfront cash charge. Investors now have access to an e-margin facility as brokers try to attract more traders. It makes it possible for traders and investors to use leverage to buy shares and keep such investments for up to a full year of trading days. Investors may settle with the broker later or select a delivery margin and transfer stocks to a Demat account soon after funds are available. You can approach a good brokerage firm to simplify the process.
Good Margin Trade Practices
- Invest Wisely: If you intend to invest through margin trading, you must exercise extreme caution. Both gains and losses can compound while trading on margin. You should invest in the margin if you believe in surviving a short swing against your position and fulfilling the margin call.
- Borrowing Lesser than the Permissible Amount: You should avoid borrowing more than the allowed limit. Try it with a lower quantity at first and see how it goes. Once you have confidence in your ability to make good gains, you can continue trading on margin.
- Borrow for Shorter Time Interval: Margin is like a loan, and you must pay interest. It’s best to settle the margin as soon as possible to avoid accruing further interest.
Advantages of Trading on Margin
Margin trading is appropriate for investors who want to profit from price movements in the near term but do not have enough funds.
It is possible to use securities from the portfolio or Demat account as a security or collateral.
Margin Trading Funds increase the rate of return on investment.
It increases the buying power of investors. Federal Reserve Board Regulation T allows investors to draw up to 50% of the cost of a securities transaction on margin. As a result, if you wanted to purchase stock worth 10,000 Indian National Rupees, you could put 5,000 INR down and borrow a further 5,000 INR to obtain shares for the remaining 5,000 INR, which brings your total investment to 10,000 INR.
Things to keep in mind for trading with margin
If the market goes against you, the margin may generate losses instead of profits. It is due to your loss is determined by using the position’s entire value. However, measures such as implementing risk management may lessen the downsides of margin. Therefore, consult a good asset management company that helps identify threats and manage your portfolio.
Key Takeaways
- In margin trading, your trading account credits to increase its trading value.
- When you trade on margin, each rupee in your account is worth more in a trade than it is at face value.
- This method is responsible for high gains but sometimes can incur significant losses.
- Margin trading is best for experienced traders who have defined a clear risk management policy.
Margin trading boosts the purchasing power of investors. It is just another tool that you can use to make impressive gains. Get on board with margin trading with some expertise and a tight risk management policy. You can opt for an E-Margin facility. It will not only empower you with extra buying power but also will help you position with the extra time for all positional trades. For brokerage-related support, advice, and analysis, consult a good brokerage firm.
Happy Investing!
