Margin Trading in Share Market

Margin trading is a trading process in which a trader or investor can increase his return by investing more than what they can afford. In marginal trading, investors can earn high returns by buying stocks at marginal price instead of actual market price. This can be done by either lending money from a stock broker or as a loan. The stock broker will charge an interest rate. The margin trading can be settled by squaring off of their position in the stock market.

How Does Margin Trade Work?

In online share trading, traders buy and sell beyond their resources. 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 and NSE trading, margin trading requires opening 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.

The initial margin, which is the minimum amount to be paid, is set at 40% of the value of the stocks to be purchased. In comparison, the 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 specific price and the above criteria are 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 of meeting 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 have an investment on margin for a more extended period, you will most likely make more losses than gains.

Margin Trading Example India

Let's say you have INR 50,000 in your trading account and want to buy shares worth INR 100,000. With margin trading, you can borrow the remaining INR 50,000 from your broker, using your existing shares as collateral. If the share price increases by 10%, your profit would be INR 10,000 (10% of INR 100,000), minus any interest costs and fees. However, if the share price decreases by 10%, your loss would also be magnified, potentially resulting in a margin call or forced liquidation of your position.

Margin Trading Strategies

Margin trading strategies involve borrowing funds to leverage your investments. Here are a few common strategies:

1. Margin Buying: This involves buying securities with borrowed funds, aiming to profit from price appreciation. It amplifies gains, but losses are also magnified.

2. Margin Selling (Short Selling): This strategy involves selling securities you don't own (borrowed from the broker) with the expectation that the price will fall. You can then buy them back at a lower price, returning the borrowed securities and pocketing the difference. It's a high-risk strategy as losses can be significant if the price rises instead.

3. Margin Call Management: It's crucial to manage margin calls effectively. Maintain a buffer in your margin account to prevent forced liquidation of your positions. Adding funds or securities to your account can help meet margin requirements.

4. Using Stop-Loss Orders: Implement stop-loss orders to limit losses. If the price moves against your position, the stop-loss order triggers a sale to minimize losses.

5. Diversification: Spread your investments across different securities to reduce risk. Avoid overleveraging in a single stock or sector.

6. Monitoring Market Trends: Stay informed about market trends, news, and events that can impact your investments. Adjust your strategies accordingly.

7. Risk Management: Understand the risks associated with margin trading. Use only a portion of your portfolio for margin trading and maintain a disciplined approach to risk management.

8. Consulting a Financial Advisor: Consider consulting with a financial advisor to develop a margin trading strategy tailored to your financial goals and risk tolerance.

Frequently Asked Questions

Margin Trading Tips

1. Understand the risks: Margin trading amplifies both gains and losses, so be aware of the increased risk.

2. Set stop-loss orders: Use stop-loss orders to limit potential losses and protect your investment.

3. Keep an eye on margin levels: Monitor your margin levels regularly to avoid margin calls and potential liquidation of your positions.

Margin Trading Exchange in India

In India, margin trading is offered by several stockbrokers and exchanges. Some of the popular stock exchanges in India that offer margin trading facilities include the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Additionally, many online brokers and trading platforms in India also provide margin trading services to their clients. It's important to carefully review the terms and conditions, as well as the risks involved, before engaging in margin trading on any platform.

Features of Margin Trading 

Margin trading features include:

1. Leverage: Borrow funds to increase buying power.

2. Short Selling: Sell securities you don't own to profit from price declines.

3. Margin Calls: Maintain minimum margin levels to avoid forced liquidation.

4. Interest Charges: Pay interest on borrowed funds.

5. Risk Management: Amplifies both gains and losses, requiring careful risk management.

Advantages of Margin Trading

Advantages of margin trading include:

1. Increased Buying Power: Margin trading allows investors to leverage their investments, potentially increasing their buying power and ability to take larger positions.

2. Potential for Higher Returns: By amplifying gains, margin trading can potentially lead to higher returns compared to investing with only cash.

3. Short Selling Opportunities: Margin trading enables investors to profit from falling prices by short selling, which is not possible in a cash-only account.

4. Portfolio Diversification: Margin trading can help diversify a portfolio by allowing investors to take positions in a wider range of securities.

5. Flexibility: Margin trading provides flexibility in managing investments, allowing investors to take advantage of short-term trading opportunities or hedge against market risks.

Limitations of Margin Trading

1. Increased Risk: Margin trading amplifies losses as well as gains.

2. Margin Calls: Falling below minimum margin requirements can lead to forced liquidation.

3. Interest Costs: Borrowed funds incur interest, reducing potential profits.

4. Market Volatility: Sudden price swings can result in significant losses.

5. Regulatory Requirements: Margin trading is subject to strict regulations and oversight.