In the financial markets, margin trading denotes buying of securities by paying margin only. The margin is an amount that an investor deposits with the broker and the financial institutions. It allows trading with cash margin and secondary collateral security. Instead of the actual stock price, the investors can deposit a proportional amount of total stock.
It is used to cover the risk in the stock market. Stock prices have the tendency to fluctuate due to the volatile nature of the market. To cover the risk, investors use derivatives in which they only need to deposit the margin money. It does not ask to trade with an actual price of the stock rather it uses a small number of funds. The investor can earn a profit with fluctuation in the actual security prices. To earn a profit, investors usually change their position on the margin. The margin is an amount that an investor deposits with the broker. He/she needs to stabilise the margin every time.
For margin trading, different concepts are needed to explore for investors. The concepts of margin trading will uncover the facts related to this trading.
Different rules of SEBI regarding margin trading:
Before 2020, investors were only allowed to do margin trading with cash margin. The stockbrokers only allowed the cash funds for trading. As per the new guidelines of SEBI (Securities and Exchange Board of India), margin trading is also allowed with collateral. With this method, shares can be used as security and collateral.
- To facilitate margin trading, brokers are allowed to open and activate a margin trading account. It is different from a Demat account.
- An investor needs to deposit a fixed margin. A margin basically has two types: initial and maintenance margin. Here, the maintenance margin is used to maintain a level at every time.
- You can earn profits by squaring off the positions. It means the use of a short position in the case of buying and the use of a long position in the case of selling.
- Different SEBI-approved brokers open trading accounts for investors.
- SEBI and stock exchanges have clear specifications about margin-based securities.
How to start trading margin trading in India?
In India, the brokers open a margin trading facility account for the investors. Brokers provide funds for the purchase of securities in the market. The funds are provided in the wallet based on margins They can be in the form of cash margin or collateral security.
It is a type of brokerage account that monitors under the control of a superior authority. With this account, an investor can do smooth margin trading.
Different advantages from margin trading:
- It is an important trading method under the surveillance of SEBI and the stock exchange.
- The cash margin facility is the easiest way to trade with margin trading.
- Collateral securities for margin trading can be used to invest in the stock market.
- It is usually an investment with the borrowed funds from brokers. In this case, the investors can expand the profits.
- The rate of return capacity is high in this triaging as compared to normal share trading.
Margin trading: Major Risk Issues
The trading entails more returns than normal shares and other securities trading. As the margin and proportional amount depend upon the actual prices, then the margin value also fluctuates. It can increase the loss potential of the investors.
It needs a fixed initial margin and also needs a high maintenance margin for the trading. A high margin can also be an important risk issue for the investor in this trading.
Thus margin trading creates an alternate method to trade in the stock market with a little amount for investment.