SHARETIPSINFO >>Articles Directory >>What is meant by margin trading?

 

Margin trading is basically buying stocks by taking a loan from the broker. It increases the buying capacity of the investor. In margin trading an investor can buy stocks of much higher value by investing only the part of the value of the stocks. Margin trading is typically done for short term, in most cases for a day.

In margin trading the buyer needs to pay only 20% to 30% of the value of the stock. Subsequently, if the price of the stock increases and the buyer sells the stock the profit and the amount that he paid for the stock is returned to his account. For example if an investor is having $1000 in his account he can buy stocks of approximately $5000. If the stocks are sold subsequently in $5500, the buyer will get back $1500. The benefit of margin trading is that, if the buyer had to pay the full value of the stock, he could have bought stocks of only $1000 and the profit from the trading would have been $100. So, margin trading gives the investors a chance to earn more with less amount of money in their account.

But there are some limitations for margin trading as well. First of all, not all the stocks are available for margin trading. Typically brokers do not permit margin trading for the penny stocks, over-the-counter bulletin board securities and initial public offerings. For doing margin trading you must have the minimum required amount in your account, that varies from stock to stock. If your account fails to have that amount at some point of time the broker will sell of the stocks to get back the amount. It typically happens when the price of the stock reduces in the market.

But this is only one side of the coin. Margin trading does have its odds as well. As margin trading allows you to buy stocks more than your capacity, if the stock price falls your loss also multiplies. This is simply because you have to incur the loss for the more number of stocks that you have bought in margin. Therefore, you need to be extra cautious while doing margin trading. You need to invest in stocks that are sure to rise in the market. You should not blindly follow a trend or news for investing in margin. Do you research well identify the right stocks and find the best investment opportunity to make the most out of margin trading.

 

 

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