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Nov-27-2018
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Margin Trading: Here are a few useful tricks and tips

Margin trading is borrowing money from a broker to take a position in stock markets. In simple terms, it means purchasing shares from borrowed funds. With margin trading, you can buy shares despite not having enough funds to afford the same by borrowing the funds from your broker. Used on a fairly common basis, Margin trading allows you to increase your exposure to equity markets despite lack of proportionate funds. It thus offers leverage and can be considered as a high-risk strategy which can potentially offer huge gains but could also lead to heavy losses.

The Securities and Exchange Board of India (SEBI) has set out detailed norms on margin trading facility. For providing such a facility, a broker may use his own funds or borrow from scheduled commercial banks or Non Banking Financial Companies (NBFCs) regulated by the Reserve Bank of India (RBI). However, the brokers are not allowed to use the funds of any client for providing the facility to another client, even if the same is authorized by the first client.

The widespread popularity of online market trading has also made it evident for the users to opt for margin trading with ease. However, it is important to understand the concept and learn how to use it to your advantage.

Offers Leverage: With margin trading, you can buy stocks in bulk despite not having sufficient funds to afford the same by borrowing the funds from your broker. This is done paying an initial margin, which is a small part of the total value of the shares bought. This margin can be settled later when you square off the position. It thus helps in offering you leverage and comes in handy when you want to take advantage of current market scenario without letting the opportunity go by.

Minimum Margin: The amount of margin paid and the repayment terms/ duration/norms etc differ from broker to broker. What is common is having an account with a margin trading facility with your broker. To open a margin account, you need to place a request with your broker and might require you to pay an amount beforehand. You have to maintain this minimum margin throughout in your margin account in order to avail thus facility.

Risk Management: Please keep in mind that margin trading and buying on margin helps investors to make stock market trades and investments with low funds. But traders must also carefully pick their deals because the loss is just as much amplified as the profit. Therefore, it is warranted that you evaluate your risk appetite cautiously. Taking guidance from a qualified financial advisor is also a good idea in this regard.

Judicious Use: You may have a margin trading facility with the best stock broker online but the ease and comfort offered by the same has to be used in a judicious manner. Investors, particularly the inexperienced ones, tend to sway with emotions and/or poor investment advice and could commit the mistake of building up a hefty position in stocks with does not suit their risk-reward profile. In case of acute market volatility, such a position can turn detrimental and could lead to huge losses. It is therefore recommended that utmost care and caution has to be maintained while using the margin trading facility.

Sufficient Liquidity: As an investor or trader, merely using margin trading facility just because it is available does not make much sense. Brokers have to ensure maintenance of the margin when it is being availed of by the client. In case of short fall, brokers would have to make necessary margin calls. Therefore, for an investor, availability of surplus liquid funds to meet up such margin calls is also a necessity.

Conclusion:

Margin trading is like a double edged sword and can prove extremely beneficial if it is used in a practical manner and by taking due care. Identifying key opportunities is the first part of successful investments and execution of the same is the second aspect of such a trade. Margin trading comes in very handy as it helps to plug in the shortfall in finances and offers ease in executing a trade. While there are enough regulatory mechanisms when it comes to disputes arising from margin funding, maintaining cordial relationships with the broker and being punctual in settling payments in a timely manner helps smoothen things out.

Blog by : Ashish Ajmera


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