Margin Trading - Profit From the Movement of Stock Prices
Are you good at guesswork or speculation? Then maybe the world of 'margin trading' is for you!
However, you need to tread with caution as you need to make an informed decision about the stock you are speculating in.
What is Marginal Trading Facility?
Buying stock on margin refers to making an upfront payment to the broker in cash, which is a small percentage of the total value of the stocks being bought.
You can buy more stocks than you can normally afford. This is known as the initial margin, which needs to be paid when you open a margin account.
Securities are bought and sold in a single session. The movement of stock needs to be accurately predicted to make a profit.
What Are the Key Features of Margin Investing?
The process of margin investing requires you to:
Open a Margin Account With a Broker
The minimum margin or the upfront money is payable to the broker in cash. The broker lends money for the purchase of shares which are kept as collateral by the broker. In case of a wrong call, the broker will recover the loss by selling the shares.
A minimum margin is an amount that must be maintained with the broker during the trading session. The reason for this is stocks can fall more than expected in a volatile trading session.
The difference between the initial margin and percentage fall in shares should not fall below the minimum margin.
Let us suppose the stock Tata Steel with a price of INR 400/- falls by 4.25%. The initial and minimum margin are 8% and 4% respectively.
The difference between the initial margin and fall in share price is 8%, minus 4.25% or 3.75%. Since this is below the minimum margin, you need to pay more money to the broker. Otherwise, the broker will sell the shares to realise the shortfall.
Squaring off
Squaring off means if you buy shares at the beginning of the day, you need to sell them at the end of the day. The reverse applies to the buying of shares at the beginning of the day.
Delivery Order
At the end of the day, a delivery order is generated, and you will have to pay for the shares as well as the broker's fees and additional charges.
Failure to do so on your part will mean that the broker will square the position.
How can I Benefit From Buying Stocks on Margin
- Buy more with less: With margin trading, you can buy more stocks than you would normally be able to afford. You pay a small percentage of the value of the stock as margin money to the broker and if the price movement is correctly predicted you make a substantial profit
- Leveraging your portfolio: You can use the stocks in your demat account for margin trading. Your shares are held as collateral by the broker, and all you need to do is ensure that the minimum margin is maintained at all times.
- Greater returns: Not only do you benefit from the long term appreciation in the value of your stocks held in the demat account, but you also stand to gain from the short term price movement of those stocks. So there are dual gains to be made, one through margin trading and the other through long term capital appreciation of stocks
- Greater buying power: It would be difficult to buy a large number of shares for most investors if they had to pay the full value. With margin investing, they pay a small percentage and own the shares.
- Safety: Trading in shares is regulated by the Securities Exchange Board of India.
How can SRE Help You Profit from Margin Trading?
With over 30 years of experience in financial services, we can help you profit from margin trading in the following ways:
- Online research: We provide you with valuable recommendations through our highly experienced research team
- Single screen market watch: You can view NSE, BSE, and commodities on one screen in real-time.
So if you are interested in stock trading opportunities that give you a high margin of profit, get in touch with us today.