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Margin trading - Features and benefits

ICICI Securities 22 Apr 2021 0 COMMENT

Margin Trading is a mechanism wherein investors can use their cash or securities as collateral to buy more shares to profit on stock price movements within a single trading session. In margin trading, the investors may earn higher returns on the capital by paying a fraction of trade value as a margin. Margin trading has benefits of leveraging as the amount being traded is high, and the price movement offers investors a quick win. However, the risk is equally high in case of an adverse price movement.

 

Features of Margin Trading:

  1. Margin trading for a Day

    - Margin trading refers to trade in stocks by paying a certain percentage of trade value instead of paying in full. Investors can open a trading account with any of the authorised stockbroking firms within India. The minimum margin is to be paid by you, and the broker can allow you to take the leverage on your trade position. All trades need to be mandatorily squared off by the end of the trading session.
  2. Margin trading for a long duration

    - In some cases, a buy position can be carried forward for a long period by maintaining a minimum margin with broker. You need to pay only a part of the total investment amount and get funding for the remaining amount. You can repay the margin amount within a certain number of days and pay the interest for those number of days on the funded amount. Margin Trading Funding enhances your investment capacity and allows you to take larger positions by investing a small amount.

 

Advantages of Margin Trading:

  1. Margin trading allows you to leverage your funds/ assets. Stocks bought on margin trading has the potential to magnify your returns due to leverage. Depending on the size of the securities you own, the returns can be maximized with careful planning and investment.
  2. Margin Trading offers the ability to profit from declines too in the share market. Leveraging the concept of short selling, investors can employ margin trading to gain profits. If Investors are anticipating a decline in the stock price on a particular day they can short-sell the stocks of a company at the current higher price, and place an order to buy them when it hits a lower price on the same day. The difference between the selling price and the buying price is the profit and leverage can help multiply your returns
  3. The advantage of margin trading is that you can trade in these assets at any point without worrying about additional forms and documentation. Ever since the norms are relaxed to offer shares as securities, margin trading allows investors to leverage idle stocks in their portfolio as collateral to make larger trades and profit from it. This process of using shares as securities to get additional margin can be done completely online.

While margin trading is lucrative and attractive to investors due to the leverage, it must be kept in mind that the chances of a loss are equally high given the risks associated. In case of adverse price movements, one can even lose their assets or stocks. It is advisable that one carefully gathers relevant information before investing in margin trading.

Conclusion:

Margin trading is a viable method of improving the returns on investment due to the benefit of leverage. However, one has to keep in mind that stock markets are extremely volatile and leveraged positions can make it riskier. It is important to have the right knowledge and understanding before one ventures into such products.

Disclaimer: Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. The contents herein mentioned are solely for informational purpose and shall not be considered as an invitation or persuasion to trade or invest.