Understand What is Margin Trading in Share Market with Definition and Examples.
Margin Share Trading in India is different from United States or other Countries. Here I will explain Margin Share Trading in Stock Market India.
What is Margin Trading in Stock Market?
In India, buying or selling shares on margin means taking possession of shares at the beginning of the settlement cycle and squaring off the trade before the settlement cycle.
There is no need to borrow money or shares because the position is squared off before the settlement cycle is over.
Also Read:
- Types of Orders in Stock Market in India
- What is Intraday Share Trading?
- Share Trading Mistakes to Avoid
Margin Share Trading Vs Cash Share Trading
- For cash share trading, an investor or trader need the full amount needed to buy or sell shares. If an investor or trader don’t have enough money to pay for the transaction, he or she can go for margin share trading where he or she will have to square off the transaction before the close of the settlement cycle.
- If the price of the particular share moves in the favor of the trader during the settlement cycle, (rises in case or margin purchase and falls in case of margin sale) then he makes profit. In case the price moves in adverse direction then the trader will make loss.
Examples
1. Buying Shares On Margin
Let us say that you have Rs 1,00,000 in you bank account. With this money, you can buy 100 shares of ICICI Bank @ 1000 in cash. Alternatively you can use the money as margin to buy more shares. Assuming that the margin rate is 25%, you can now buy upto 400 shares of ICICI Bank @ 1,000.
The value of 400 shares @ 1,000 is Rs. 4,000,000 but because the margin is 25%, you need to have just Rs. 1,00,00 in your bank account to do the transaction.
But, because you don’t have Rs. 4,00,000 in your bank account to buy 400 shares of ICICI Bank, you will have to square off your purchase transaction by placing a sell order by end of the settlement cycle.
If the price or shares of ICICI Bank rises to Rs. 1,100 before end of the settlement cycle, you will make a profit of Rs. 40,000.
If the price falls during the settlement cycle, you will still have to square off the transaction and book loss. This loss will be deducted from the margin amount.
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- Securities Lending in Share Trading
- Intraday Trading Tips and Strategies for Beginners
- How to Select Stocks for Intraday Trading
2. Selling On Margin
Selling shares on margin is just the opposite of buying shares on margin.
Margin Trading refers Borrowing Funds from a Broker to Trade a Financial Asset such a Shares of a Stock. Investors can buy stocks by paying a marginal amount of the actual value. It is a kind of Loan from the Broker. Margin = Value of Investment - Money Borrowed from Broker (Loan) Margin Trading means High Risk, High Gain. Margin Trading strengthen the effects of loss. At times, the Broker may issue a margin call, and the investor may have to liquidate his or her position in a stock or seed more capital to hold position. Yes, Margin Trading is Legal in Stocks. Investors can buy stocks by paying a marginal amount of the actual value. Ramesh has Rs. 10,000 is Cash but He wants to Buy Securities worth Rs. 20,000. He can do this with Margin Trading by using his Rs. 10,000 and Borrowing another Rs. 10,000 from his Broker. If the value of the bought securities rises to Rs. 25,000 after 2 months and the Loan from Broker remain Rs. 10,000, then Value of Equity Held by Ramesh is Nor Rs. 15,000. Initially he had just Rs. 10,000 in Cash. So his Profit is Rs. 5,000. Remember: There are charges involved with the amount borrowed (loan) from the Broker. This interest is typically Calculated on the Amount Borrowed and the Number of Days the Stock was Held by the Investor. FAQs: Margin Trading
Margin Definition
Is Margin Trading a Good Idea?
Is Margin Trading Legal?
What is the Margin Trading with Example?
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