Margin trading is different from a normal trading account. Here, if you are an investor, you do not have to pay any cash initially for shares or stocks bought by you. Instead, you may deposit a portion (a percentage) of the transaction amount, and your broker bears the rest by providing mar. This is an account where your broker gives you a loan to start trading. It is noteworthy to be aware that margins are not merely for stocks but are used extensively in derivatives such as futures trading and commodities trading.
There is no doubt that trading shares require wealth. For traders just getting used to the ropes, margin trading facility may be a good way to get started, provided investors are fully conscious that loans must be repaid in some way if losses occur.
Some brokers may even lend investors a large portion of margin trading in India to buy shares/stocks. You should know that the amount of the margin you choose to deposit with your broker before making a transaction is called the initial margin. Whether you are engaged in margin trading in stock market or margin commodity trading, you can always open a margin trading account with a broker if the broker is proving the margin facility. When the broker lends you money to finance your purchases of shares, they may use their funds or borrow these from NBFCs (non-banking financial companies), validated by the Reserve Bank of India.
There may be some advantages to having a trading account which is a margin trading account. The most prominent perk of such an account is when you indulge in margin trading in shares. Such an account allows you to trade in multiples of the initial margin, and this is rightly known as ‘leverage’.
An example can explain this further. Assuming that the initial margin deposit is 20% of your transaction, you can trade in Rs. 1 crore worth of shares. In this case, the initial amount you would deposit with your trader would be Rs. 20 lakh. You can, thus, engage yourself in a high volume of trades. On the flip side, let us assume that you have Rs. 20,000 to invest in any trading assets, whether in stock or commodity trading. Now you take a decision not to conduct margin trading. Instead, you invest Rs. 20,000 in a company and buy 100 shares priced at Rs. 200 per share. If the share value rises by 10%, you profit Rs. 2,000. Contrastingly, if you deposit the same Rs. Twenty thousand in a margin trading account, the initial margin may be set at 20%, giving you leeway to buy 400 shares of any given company worth Rs. 80,000. If these prices go up by 10%, you earn a profit of Rs. 8,000 (as against Rs. 2,000 in a non-margin account). However, prices of assets may fall too, and in such cases, you may have to deposit more funds with your broker. While returns are high, risks are on the upper side too.
Margin trading in shares, margin trading in stocks, margin trading in derivatives, margin currency trading and other assets requires investors to open a margin trading account. Whenever you trade in stocks, you also need to have a Demat account, and this will be linked to your trading account, whether a margin trading account or a trading account that is a regular cash account. Any trading account can be opened with a reputed brokerage, like RKFS. However, investors and traders must be aware that only registered corporate brokers with a net worth of Rs. 3 crores can offer margin trading account facilities to investors and traders. With the best-in-class services and adhering to all SEBI (Securities and Exchange Board of India) regulations, RKFS is a broker worth exploring.
Whether you open a margin trading account for commodity trading or trading in derivatives, you should know that margins are computed in various ways in the segment of cash markets of stock/share exchanges. The different methods are highlighted below:
This is also colloquially known as “MTM” and is calculated on any open positions towards the close of the day of trading. In this calculation, the price of the transaction is compared with the closing value of the stock or share.
“VaR” Margin: The commonest method is estimating the margin based on the loss probability by considering historical information and data. Past trends and stock volatility play a big role here. You can, as an investor, gauge the highest possible percentage gain or loss with close to a confidence level of 90% or more.
“Extreme Loss” Margin:
When you open a margin account, you should place deposits that have you covered in case of an expected loss.
As with any trading and investment, you may find that a trading account with margins is suitable for you or not. Investors must choose investment instruments and methods of investing that suit their individual financial goals. It would help if you also considered risk tolerance levels as an investor. If you are a dynamic risk-taker, margin accounts may be for you, giving you an impetus to invest. You should know that margin accounts exist for those who wish to trade in commodity futures and options within exchanges suited to commodity trading, like the MCX (Multi-Commodity Exchange). Trading commodities with margin accounts poses a relatively lower risk as margins are typically kept low. They could go as low as just 3% to 5%. Hence, if you still want to use this trading method and take a good position in commodity futures and operations by using leverage,
then you can do so. As pointed out earlier, leverage gives investors significant scope for earning profit. It can also expose investors to losses, but you are taking a calculated risk with lower margins. Note that although commodity trading with margins may offer a lower risk than trading in stocks, in the same way, commodities are prone to be volatile assets relative to shares and stocks.
To engage yourself in margin trading in shares, there is a necessity to open a trading account.
You have to take the following steps to do so:
MTF terms and conditions*
You can understand more about margin accounts and trade with the same at India’s most efficient and dependable brokerage, RKFS. Margin trading may not match the requirements and trading habits of traditional investors who have a low-risk tolerance. It is, however, suitable for trading with the short term in mind. If you have reliable information about a particular company whose stocks you wish to trade in, and this information is favorable for your trades, you may go ahead and invest with a margin trading account. You can learn about the potential of companies at RKFS, the broker that helps you with a knowledge base that leads to profit.
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Margin accounts allow you to invest more than your investment limit. Margin is a loan you get from your broker. Margin means borrowing money from your broker to purchase securities. Margin buying means that the trader pays only a portion of the asset value, and the remainder is paid by the broker. You can borrow money from your broker to buy securities, so if the margin is 10% you can invest as much as 10 times your margin deposit.
According to SEBI guidelines clients who wish to obtain margin facility must maintain a minimum of 50 percent and 40% as initial and maintenance margins, respectively. This is paid in cash.
This is the minimum amount. It is calculated as a percentage from the total investment amount. To fulfill the full settlement obligation, the broker will use the initial Margin.
This is the minimum amount the client must maintain in their margin account. It is calculated as a percentage from the market value as determined by the closing price of securities that were forwarded as collateral.
Ask the broker for details on how to open a Margin Account and the associated costs.
A cash account is better for conservative investors than those with a high-risk tolerance. All transactions in a cash account are made with the money that is available.
Margin brokerage accounts are a unique feature that allows traders the ability to increase their investment capacity by a broker forwarded loan amount. This is usually more than the initial deposit. This allows traders to place larger trade volumes or to make a profit by selling short.
Margin accounts allow investors to borrow against their existing stocks to purchase a new asset, or to sell short. Stock margin accounts can be risky. This is a good option for investors who are willing to take high-risk risks.
A margin loan can be considered a secured loan. You will need to deposit an initial amount and maintain a balance in your account to be eligible for a margin loan. Because it is a secured loan, your credit report will not be affected. The broker will notify the borrower if your maintenance balance drops.
Margin account can only impact your credit score if you cannot repay the loan or the assets/securities are destroyed.
After reading this explanation, you can open your RKFS margin account and Start enjoying the benefits.
You will need to open a margin bank account. This account requires an initial deposit. You can also receive a margin loan up to 50% of the deal value.
Investors and traders can open a Margin Account against the payment of the required cash deposit. Margin facility is only available to select brokerages. SEBI allows brokerages worth over three crores to offer clients stock margin account facilities.