Latest Trends In Market For Trading in Margin

‘Margin” means borrowing money from your broker to buy a stock. Now the query is why would you borrow? Investors usually go for trading on margin so to increase their purchasing power so that they can own more stock without fully paying for it.

Many times you would have come across a term Margin trading. What is trading on margin and how is it different from normal trading is what is explicated here.

That means you will pay a part of the buy cost and the broker will lend you the difference.

For the loan you’ve taken -

Let us understand this with an example:

* You will pay interest in addition to the usual fees. * Broker will hold the stocks as collateral and has the right to sell that as well in case buyer doesn’t meet sure obligations as per margin rules and agreements.

Suppose you want to buy a stock with market price of Rs 50. Under margin trading, you would be paying Rs 25 in money while remaining 25 Rs will be lent to you by the broker (Assuming the preliminary margin requirement along with your broker is 50%). How does this help? Let’s see. Suppose the price of the stock rises to Rs 75.

In case of Margin trading – Your return on the investment is 100% because you paid Rs 25.

However there’s also an equal probability of higher loss for trading on margin. Suppose the stock price falls to Rs 25. in the event you fully paid for the stock, you lost 50 percent of your money.

In case of normal trading – Your return on investment is 50% because you paid Rs 50.

By this you would even loose the chance to make up your losses when the cost goes up later. Below are certain terms that would make the idea more clear.

But in the event you have traded on margin, you lost 100 percent. & on the top of that you’re supposed to pay interest for the loan you have taken from the broker along with the broker’s commission. Moreover if the investor doesn’t maintain maximum margin in his account the broker will have the right to sell all of your stocks without notifying you.

Preliminary margin: The proportion of total purchase cost an investor is meant to deposit for opening a margin account is referred as its preliminary margin and is usually 50% of the total value.

Maintenance margin: In order to keep the margin account open for doing margin trading, it is necessary to maintain maximum money or marginable securities which are called the maintenance margin. This is to prevent an investor from incurring a level of debt that they would not be able to repay.

Margin call: If your account falls below the maintenance margin, your broker will make a margin call to ask you to deposit more funds or securities into your account. If case you fail to meet the margin call, your broker will sell your securities so to make up for the stipulated maintenance requirement.

Lastly, for novice traders it is important to have a realization that trading on margin can help you magnify your profit and simultaneously multiplies the associated risks.

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