All you need to know about Margin Trading
Author: Libord Brokerage Pvt. Ltd Posted on 03 Jul 2023 15:23:09Category : Knowledge Center
What is Margin Trading?
Margin trading is a way of trading where investors borrow money from brokers to buy more stocks than they can afford. This allows them to potentially earn higher profits. The borrowed money is later repaid when the investors sell their stocks. It helps investors to invest more and increase their chances of making bigger profits.
SEBI Regulations Regarding Margin Trading
Margin trading in India used to be limited to using cash only, but in 2018, the Securities and Exchange Board of India (SEBI) introduced new rules allowing investors to use their shares as collateral for margin trading. This means that investors can borrow money from authorized brokers to trade in the market, using their shares as security. It gives them the ability to amplify their market position and potentially earn higher profits, but it also carries certain risks. These changes were made to regulate margin trading and ensure that it is done through authorized brokers.
Advantages of Margin Trading
Margin trading allows investors to profit from short-term price changes in the stock market even if they do not have enough cash. It lets them borrow funds to increase their investment and potentially maximize returns. They can use their securities as collateral. However, margin trading carries high risks, including the potential for losing more than what was invested. Investors must maintain a minimum account balance and face the risk of their assets being liquidated by brokers. To minimize losses, investors should settle the borrowed amount quickly, avoid borrowing the maximum allowed, and have sufficient cash in case the market goes against them.
Eligibility for Margin Trading
To use margin trading, you need to have a special account with a broker. Each broker has its own requirements for how much money you need to deposit initially. You also need to always maintain a certain minimum balance in your account. If you fail to keep the minimum balance, the broker will automatically close your trade to protect themselves. At the end of each trading session, any open positions you have will be closed out. Essentially, this means that if you want to use margin trading, you need to follow the broker's rules and have enough money in your account to cover potential losses. If you do not meet these requirements, the broker will close your trades.
Margin Trading with Mutual Funds
Buying mutual fund units using margin trading is not possible because mutual funds are traded differently from stocks. When you buy stocks, you can use margin trading to borrow money and increase your buying power. However, mutual funds are bought and sold through mutual fund houses. The pricing of mutual fund units is determined at the end of each trading day when the market closes. Because of these differences, you cannot use margin trading to purchase mutual fund units.
How is Margin Determined?
Margin, or leverage, is like a loan that brokers provide to traders. It is calculated based on the value of your investments and serves as a guarantee that you can carry out your trades. The margin limit is the maximum amount of money that brokers are willing to lend you, and it is a percentage of the total value of your account's securities. In simple terms, margin allows you to borrow money from your broker to make larger investments, but there is a limit to how much you can borrow based on the value of your holdings.
Is margin trading a good idea?
Margin trading is a technique where investors borrow money to buy more stocks or investments than they can afford with their own funds. However, it is a strategy that should only be used by experienced investors who are comfortable with the risks involved. It is not recommended for rookie investors because it is a high-risk gamble that can lead to significant losses. For beginners, it is generally better to start with cash accounts. With a cash account, you use your own money to invest and learn about the market. This allows you to understand how investments work and gain experience without taking on the additional risk and complexity of margin trading.
Broking Charges at Libord
Libord Brokerage Private Limited charges a margin for intraday trading in equity and futures of 0.01% or Rs. 20 on executed trades, whichever is lower, for equity delivery of zero brokerage, and for stock options of flat Rs. 20 on executed orders. There is no additional margin offered for Libord Brokerage Private Limited F&O carry forward positions and equity delivery trades.
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