What is margin trading? How does it work?
In the course of online share trading, traders buy and sell beyond resources that they own. This is carried out by borrowing or lending securities wherein a trader puts in a margin with the mediator, which is a percentage of the value of the transaction. This experience is known as margin trading.
In both BSE trading and NSE trading, margin trading requires the opening of a margin account. The facility is available to all traders, whether they employ in online share trading or otherwise. Investors can open a margin account with a broker with a minimum margin amount paid in.
As soon as the account is operative, you can borrow up to 50% of the price of a stock that you want to acquire.Margin trading is a leveraging mechanism that permits investors to commence on a larger exposure in the market than what is conventionally possible with only their resources.
The Securities and Exchange Board of India governs and establishes eligibility criteria for allowing the facility in India.
Initial margin, which is the minimum amount to be paid, is set at 40% of the value of the stocks to be purchased, while maintenance margin which is at 50% is the minimum amount of the security valued at 50% or more of the total value of the margin account.
If any of the securities drops below a certain price and the above criteria is not met, the investor is given a margin call from the broker where he must pay up the balance of the amount up to the maintenance margin.
When a trader buys a security in the margin account, the investor gets the profits or losses as they are from his account. When a client is incapable to meet the margin call, the broker generally sells the security and retains the profit from the sale.
Investing on margin is by and large for a shorter term as the longer you hold an investment, the more return you require to break even. If you hold an investment on margin for a longer period, you are most likely to make more losses than gains.