Friday, August 5, 2011

What is Margin Trading?

Margin share trading is different in United States and in India. Here I will explain margin share trading in India.

In India, buying or selling shares on margin means taking possession of shares at the beginning of the settlement cycle and squaring off the trade before the settlement cycle. There is no need to borrow money or shares because the position is squared off before the settlement cycle is over.

Margin Share Trading Vs Cash Share Trading

Margin Trading
For cash share trading, an investor or trader need the full amount needed to buy or sell shares. If an investor or trader don't have enough money to pay for the transaction, he or she can go for margin share trading where he or she will have to square off the transaction before the close of the settlement cycle. If the price of the particular share moves in the favor of the trader during the settlement cycle, (rises in case or margin purchase and falls in case of margin sale) the he makes profit. In case the price moves in adverse direction then the trader will make loss.

Examples:

Buying Shares On Margin : Let us say that you have Rs 1,00,000 in you bank account. With this money, you can buy 100 shares of ICICI Bank @ 1000 in cash. Alternatively you can use the money as margin to buy more shares. Assuming that the margin rate is 25%, you can now buy upto 400 shares of ICICI Bank @ 1,000. The value of 400 shares @ 1,000 is Rs. 4,000,000 but because the margin is 25%, you need to have just Rs. 1,00,00 in your bank account to do the transaction. But, because you don't have Rs. 4,00,000 in your bank account to buy 400 shares of ICICI Bank, you will have to square off your purchase transaction by placing a sell order by end of the settlement cycle. If the price or shares of ICICI Bank rises to Rs. 1,100 before end of the settlement cycle, you will make a profit of Rs. 40,000. If the price falls during the settlement cycle, you will still have to square off the transaction and book loss. This loss will be deducted from the margin amount.

Selling On Margin : Selling shares on margin is just the opposite of buying shares on margin.

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