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    Margin Trading

    INTRODUCTION: 

    An investor having appetite to leverage his investment capacity, may indulge in borrowing funds to invest in Securities and can plan to earn profits out of the investment activity. Normally an investor has to provide security to the lender for funds being borrowed. The borrowings made with an intent to invest in Securities is normally called as Margin Trading. 

    To overcome the difficulties of maintaining the leverage at the time of investing in various securities In order to provide such facility SEBI has come up with a concept named MARGIN TRADING.f ramed a Scheme called Securities Lending Scheme, 1997. Also it has framed legal framework for Margin Funding by various intermediaries of the Securities Market. All the above concepts are cumulatively called as “Margin Trading”

     

    Though we have many opportunities to invest in various securities there is a lack of deposits funds available with the investors in order to maintain balance between these Margin trading has been introduced. encash the movements of Securities Market. 

    For what Margin Trading is??

     

    • Margin trading allows you investors to buy more stock than you he would be able to buy normally; ØBuying on margin is mainly used for short-term investments; 
    • Totrade on margin, you Investor need to open a Margin Account with the Stock Broker/ NBFC who is providing the funds;
    • Brokershould obtain your Investor’s signature to open a margin account;
    • Aninitial investment is required for a margin account which varies for each broker;
    • Marginable securities in the account are collateral.

     

    Can all stocks qualify to be bought on Margin??

     

    ?TheSecurities and Exchange Board of India (SEBI)/ Stock Exchanges regulates which stocks should be marginable & which are not;

     

    ?Brokerswill not allow customers clients to purchase penny stocks, specified securities or initial public offerings (IPOs) on margin because of the day-to-day risks involved with these types of stocks.

     

    Requirements for Margin Account:

     

    vInitialMargin: The Portion of the purchase price that you investor deposit is known as the Initial Margin. The SEBI sets a minimum initial margin of 50% of Purchase value of Securities.

     

    vMaintenance Margin:The minimum account balance you investor must maintain before you're the broker forces you borrower to deposit more funds or sell stock to pay down your loan is known as the Maintenance Margin. Maintenance margin of atleast 25% of market price of the securities should be maintained as per SEBI/SEs.

     

     

    vMarginCall: A margin call forces the investor to either Liquidate his/her position in the stock or add more cash/ collateral securities to the account.

     

    What if youinvestor/borrower do not meet a Margin Call???

     

    ?Ifforany reason you investor does not meet a margin call, the brokerage has the right to sell your borrower’s securities to increase your account equity until you are above the maintenance margin; liquidate the positions/ margins that need to be paid to the Stock Exchange(s)

     

    ?Evenscarier is the fact that your broker may not be required to consult you investor before selling! !?YouInvestor can't even control which stock is sold to cover the margin call.

     

    Advantages of Margin Trading:

     

    ?Increased buying power with less money.

    ?Moreprofit with less investment.

    ?Atradercan borrow 50% of his purchasing price.

     

    ?Greatlysuitable to day traders, who need wish to complete more number of trades with higher volume of stocks.

     

    ?Suitablefor experienced traders, having knowledge of stock market trend patterns.

    ?Allowsuse of Financial Leverage.

     

    Disadvantages of Margin trading:

     

    ?Ifstockgoes nowhere, you investor still have to pay interest on the margin Loan; ?Addmore burdens on traders’ shoulders in losing trades; ?Cannottrade in all stocks – like penny stocks, IPOs etc.,

     

    ?YourInvestor’s account balance and buying power changes with changes in stock prices; ?Thechance of Margin Call is always prevailing;

     

    ?YouInvestorsare always obligated to keep a minimum account balance – the Maintenance Margin; ?Withfalling stock prices, the traders have much less control.

     

    Strategies to mitigate risk:

     

    ?Haveample reserves of cash or marginable securities in your investor’s account; ?Ifyou’re investor is a beginner, consider using margin to buy stock in large companies that have a

     

    relatively stable price and pay a good dividend;

    ?Constantly monitor your stocks;

    ?Haveapayback plan for your margin debt.

     

     

    Margin trading Vs. Future Markets:

     

    ?Mostinvestors buy the futures, but there are few stocks where margin trading makes more sense. If a stock is not in the futures Derivatives (Futures)list, the client investor can go for margin funding.

     

    ?Sincefutures are generally not available beyond one or two6 months, if the client investor has a longer view, then margin trading is better. Also, some brokers offer lower interest rates on margin trading than the prevalent rates of future market.

     

    ?Generally, when you investordeposit a margin on a stock purchase, you investor buy partial equity of the stock position and owe the balance as debt. In the futures market, a margin act as a security deposit that protects the exchange from default by or from the brokerage house.

     

    Conclusion:

     

    Margin trading can be compared to a gamble. It's either you investor make lots of money, or lose all of it.

     

    But, usually the odds are not in your investor favour.

     

     

     

     

     

     

     

     

     

    In a day, when you don’t come across any problem – you can be sure that you are travelling in a wrong path

     

    – Swami Vivekanada

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