Features And Benefits Of Margin Trading In Share Market |

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Benefits Of Margin Trading

Investing in the stock market is becoming more and more popular with time. Different types of people prefer different types of trading, depending upon their need for profit and their risk appetite. In this article, we are going to know about one such type of trading, Margin Trading, its benefits, and the key features of margin trading. Let us first see what a Demat account is.

Demat stands for Dematerialization. It is an account where brokers keep our dematerialized shares after settlement.

What is Margin Trading?

Margin trading, in simple words, is a type of trading where the investor can buy stocks of more value than he/she can afford with their existing transactional balance. You need a separate margin account to do margin trading. Let us understand this with an example.

Suppose you have Rs. 5000 in your trading account, and you want to buy stocks of the company ABC which are trading today at Rs. 100 per share. Now, as per normal trading rules, you can buy a maximum of 50 shares with the money which you have. Here your broker can provide a margin, which can be understood as a loan, of 5000 or more, depending upon your broker, to buy the stocks of ABC. Now if you use this margin along with your own funds, you can buy shares worth Rs. 10000. If the share price increases by 10%, your profit will be Rs. 1000 (instead of Rs. 500 which would happen if you do not take margin). 

This sounds too good on the part of brokers, but it does happen exactly this way, and the reason is the brokerage. Even if 50% of the amount for which you trade is from the margin given by the broker, the brokerage will be charged on the entire transaction amount (i.e., on Rs. 10000 as in our example). 

Brokers, however, do not offer margin on every type of trade. Most brokers provide maximum margin on Intraday trades. A lesser amount of margin is available on Swing Trading, while margin on long-term investments is rare. Margins also vary from one stock to the other. It is advisable to clearly understand the terms of margin trading with the broker before trading.

Benefits of Margin Trading

Margin trading has a lot of benefits. Some of them are mentioned below:

  • More profits with lower investment. As explained earlier, you can buy more stocks with the money you borrow as margin and hence more profit.
  • It provides you with trading flexibility, as you can buy and sell easily due to extra funds.
  • It helps you to increase diversification by allowing you to buy different stocks and giving you more room to diversify the portfolio.
  • The profits earned are tax-deductible.

Why choose margin trading/ Features of margin Trading

  • Margin trading has fewer chances of fraud as it is very closely monitored by SEBI.
  • Margin trading allows you to extend the settlement period to T+N days, which is useful for Intraday and Swing traders.
  • Only trustworthy and valuable stocks can be bought by using margin.
  • ROI is much higher than regular trading
  • You can also use your existing shares in the Demat account as security for margin.
  • Margin trading allows you to take bigger trades than you would with real capital on the basis of your strategy – as you can borrow higher amounts and take leverage trades

Conclusion

Margin trading provides you with the opportunity to take short-term loans to make huge profits. The features of Margin trading make it a preferable choice over other methods. Check availability of margin and the prerequisites of margin trading with your broker before starting to trade keeping in mind the risks involved. 

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