A Guide to Trading on Margin
What is Margin Trading?
Margin trading is a type of trading, where investors can buy stocks more than they can afford to. Margin Traders are those investors who practice the process of trading by lending money from a broker and giving a share as collateral. Trading on margin can help investors gain quick money, as in this method of trading, they invest in stocks that they purchased at a marginal price of their value. You need to maintain the minimum margin, all along with the session, as sometimes the stock price might fall lower than what the investor had predicted.
There are a few steps that need to be followed to not get squared off your position in the market by the broker -
- If the stock price falls lower and the trade-off is lesser than the minimum margin, then you will have to maintain the margin by giving more money to the broker.
- After every trading session, you must square off from your position. This means, if you sold your shares, you need to buy them, whereas if you bought them, then you will have to sell.
- After a trade, you must have cash ready to pay the broker and to buy the shares which you bought during the trading session.
Who can Margin Trade?
Anybody who has a margin account with a broker can use the margin trading facility. The broker will have the Investor pay a minimum to him when creating a margin trading facility account. The investor must also be able to maintain a minimum balance, throughout the trading session. Squaring off from the position is necessary at the end of each trading session. Once the margin trading account is created, you can start purchasing stocks that will be funded by the broker. If predicted and invested rightly, the investor may get higher returns than they would have gotten without being funded by a broker.
Advantages, Disadvantages, and Risks of Margin Trading
- Margin trading is of benefit to the investors who want to invest in stocks and gain quick cash in a very short period of time, but don't have enough money in hand.
- The shares of the stock can be used as collateral.
- A margin account can bring in higher returns on the stocks invested in.
- The margin trade facility is monitored by the stock exchange.
- Margin trading can also help investors to leverage their position in stocks in the market.
- However, if the stock price falls very low, you might even lose more than you had invested, and you will have to deal with the broker and maintain the minimum balance or you might get squared off your position, by the broker.
- The minimum balance in your margin account must be maintained at all times. If your minimum balance is not maintained and your balance is very low, you will be forced to compensate by selling assets to maintain the minimum balance.
- If you fail to maintain the minimum balance in your margin trading account, the broker has all the rights to initiate an action against you. The broker can also liquidate your assets to recover the amount.
How to Open a Margin Trading Account
- You are required to fill the account opening form for the Demat account.
- Next, you are supposed to submit the documents for proof of residential address.
- Then, you are required to verify your mobile number, in person or on the phone.
- You also need to sign a document of Rights and Obligations.
- You will then get a verification link on your email, and once you confirm it, you will be given an ID and Password.
- After all the steps are completed, you will avail the access to do margin trading.
Can anyone open a margin trading account?
Yes, anybody can open a margin trading account, provided you have a minimum balance and will be able to maintain a minimum balance throughout a trading session.
How to use a margin trading account?
You can use a margin trading account by contacting your broker to fund your investments and giving your share as collateral. Then, you can use your funds to invest and purchase the stocks.
Is margin trading a good idea?
Margin trading is a very good idea if you want to gain a lot of money over the short-term. All you have to do is monitor the stock exchange, predict, and invest wisely while maintaining your minimum balance.