What does the term term “Margin Trading” mean ?
November 3rd, 2010
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.
‘Margin” means borrowing money from your broker to buy a stock. Now the question is why would you borrow? Investors generally go for trading on margin so to increase their purchasing power so that they can own more stock without fully paying for it. That means you will pay a part of the buy price and the broker will lend you the difference.
For the loan you have taken -
- 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 certain obligations as per margin rules and agreements.
Let us understand this with an example:
Suppose you wish to buy a stock with market price of Rs 50. Under margin trading, you would be paying Rs 25 in cash while remaining 25 Rs will be lent to you by the broker (Assuming the initial margin requirement 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.
In case of normal trading – Your return on investment is 50% because you paid Rs 50.
However there is also an equal probability of higher loss for trading on margin. Suppose the stock price falls to Rs 25. If you fully paid for the stock, you lost 50 percent of your money. But if you have traded on margin, you lost 100 percent. And on the top of that you are 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 minimum margin in his account the broker will have the right to sell all your stocks without notifying you. By this you would even loose the chance to make up your losses when the price goes up later. Below are certain terms that would make the concept more clear.
Initial margin: The proportion of total purchase price an investor is supposed to deposit for opening a margin account is referred as its initial margin and is generally 50% of the total value.
Maintenance margin: In order to keep the margin account open for doing margin trading, it is necessary to maintain minimum cash or marginable securities which is called the maintenance margin. This is just to prevent an investor from incurring a level of debt that he 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 cash 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 very important to have a realization that trading on margin can help you magnify your profit and at the same time multiplies the associated risks.
Happy DIWALI and Happy Investing
Renuka Kinger
Categories: Investing Trends, Trading Basics, Your Money
very good . advice for margin. please send me how to start bying equity(share ) , I want o buy and sell in nitra day for earing small amount of money
reGARDS
KISHOR
excellent info for new comers like me.
i am learning the basics i want to kn the risk factors
and liability factors i want to buy some shares this
is my entering to share bussiness
The available info is very interesting and very important before steping to stocks and shares.
nice guidelines for beginers… kindly let me know about stocks in which beginers can invest..
Regards,
sivaranjani
I really like the information provided here. It seems to be really helpful and guiding.
the notes was excellent information was both inteesting and informative
.
thank u for providing useful information…….can u suggest me what kind of shares should i purchase initially???? better for go longterm investment or short term investment???
nice line for learner of stock market..
hi, pl tell me list of all scrips involved in calculating SENSEX? what is their relative weightage?
also, what happens to sensex when oil barrel price increase globally? and why? pl reply on e mail.
thanks.
i am new to this feld…. i am disappointed by doing sales job. i am very intrested in stock market, can u teach me, i want to learn from the begeing….
well this site give lot of information about the share market in a very simple and meaningful way..For getting the information about share market for the new user it is the one of the best resource.
I Am very keen ton play in share market but bcoz of lack of knowledge i dont do that.please let me know from where I can get more knowledge which can help in thon same
very good advice from your end………please forward/mail me some useful advice and contacts of dependable brokers/sub-brokers in Delhi’s stock exchange market.
Very useful information and it is very easy to understand as i am a beginer to share market.
very good information.
my question is, can we invest without using margin.
Means just to avoid paying interest to brocker?
please me by maths calculation in case of margin trading The return should be 200% when price moved from 25 to 75
good information for new investores.
i am new in this market so plz give me advise how will share buy and sell
That was very cool indeed. Brilliant article and I will soon be putting the info to good use. In order to keep the margin account open for doing margin trading, it is necessary to maintain minimum cash or marginable securities which are called the maintenance margin. This is just to prevent an investor from incurring a level of debt that he would not be able to repay. If there was no danger of a margin call you would in average in the long run most likely have the same amount that you started with. However, a relatively small drop in stock price can trigger your stop-loss or margin call, so the probability of losing money is greater than the probability of making money. Simply, although contracts for difference are a viable trading instrument, trading on a very short-term basis is likely to work against you and is best avoided.
Firstly I would like to thank for giving so usefull information for Margin trading.I would like to know the different kinds of taxation leveid in share marketing if any…
Exlent information .the information given here is marvellous for beginner in share market.
Really, This is very usefull information for the New commer, like me . I wanna enter in to sharemarket trading, i’ m wishing that send me usefull information regarding the share market.
thanks for your support.
tell me about transfering money from dmat a/c to sb a/c