Trading on margin may seem like a fascinating option for people who want to increase their purchasing power in the stock market. It lets you trade bigger positions than your own cash lets by borrowing money from your broker. This raises risks even as it might boost profits.
Understanding how trading on margin operates is crucial before applying it, whether you are investing or trading in India.
Trading on Margin:
Marginal trading is buying more stocks or trading larger lots by borrowing money from your broker. The broker funds the remaining trade value; you deposit a portion as margin, a type of security. Consider it as sort of a trade loan. Your profit or loss depends on the whole trade value rather than only your margin amount; you pay interest on the borrowed sum.
Margin Trading: An Illustration
Assume you have ₹ 1,00,000 and your broker offers five times margin. You might thus trade stocks worth up to ₹5,00,000. Should your trade go strong and you make a 5% profit on ₹5,00,000, you will make ₹25,000.
But even a 5% loss means ₹25,000 gone—25% of your own money lost—should the trade turn against you.
Trading on margin carries both power and risk.
How Does That Apply in India?
The Securities and Exchange Board of India regulates trading on margin in India. Only on particular stocks, brokers provide margin; they also only provide margin during intraday or short-term trading.
Usually, there are just two kinds:
- Margin Trading Facilities (MTF) let you pay interest on the borrowed money, so holding the position beyond one day.
- Intraday Margin: Purchased and sold on the same day, margin gets squared off before the market shuts.
Broker to broker, margin rates and available leverage vary.
Benefits of Trading on Margin:
- Expands buying capability.
- Possibility of greater earnings.
- Useful for short-term trading opportunities.
- Permits the use of limited capital.
Cons and Dangers:
- High risk of loss; you could lose more than you have invested.
- Interest on borrowed money.
- Margin calls: Should stock prices fall, you might have to sell at a loss or add more funds.
- Not fit for novices.
- Might cause emotional trading or panic reactions.
Advice Before Your Margin Trading Starts:
- Start modest and know the platform.
- Use margin just if you are sure about your trade.
- Set stop-loss rules always to safeguard your capital.
- Research the charges and interest rates of your broker.
- Never invest long-term using margin.
- Steer clear of full margin; give room for market swings.
Last Thoughts:
Though it brings great risk, trading on margin presents great possibilities. It ought to be used carefully and with good planning in the Indian market. Experienced traders who know the risks and have a rigorous plan in place will find it most suited. If you’re a novice, you would be better off staying inside your own country until you gain more knowledge and confidence.