What is margin trading? Is margin trading right thing to do?

What is margin trading or leverage in stock market? How can i do it? Is it right thing to do? You can know the answers of the questions from the article. Let’s start with first question:

What is margin trading or leverage trading?

Margin trading is a facility that about every broker gives to trader. With the help of it we can buy more share in less price. As a example, if any broker gives 10 X times margin to its customers for any stock then each trader can buy 10 share on the price of one share. As a example if any broker gives 10 X times margin or leverage on ITC ‘s one share and each share price of itc is 200 rupees then traders can buy maximum 10 shares of ITC in 200 rupees. It means you can buy 2000 rupees itc share in 200 rupees(What is margin trading).

Most of the brokers give margin or leverage for intraday trading. And few brokers only give margin for position/swing trading. And any broker does not give margin for long term investing. Every broker give margin different for each stock. Generally, more margin must be got from broker for large and well established companies and little margin can be got for small companies. To give margin or not and how much times margin should be given for any stock is fully on the hand of broker. So before margin trading you should confirm about this. 

So now the question is why brokers give margin/leverage or why brokers give a chance to buy the share of 2000 rupees share on the price of 200 rupees (it is estimated,read the above example)? And the straight answer is brokerages. Brokers charge brokerages fees on every buy or sell order. And brokerage is calculated upon order’s total value. 

If the commision of any broker is 1% and you buy 100  rupees share then broker charges 1% of 100 rupees=1 rupees. And now if you take leverage and buy the 1000 rupees share on 100 rupees (10 X margin) then broker charge you upon your total traded value( here 1000 rupees) . So now here the brokerage charge is 1% of 1000 rupees=10 rupees. And only for this broker provide margin for intraday traders and they charge more brokerage on total order price.

How can we do margin trading?

To do margin trading you need first a trading account(open new trading account). After opening you have to add fund on the account. And then you should check the margin of stock/derivative where you want to do trading. Now you can do margin trading according to margin. Just remember before margin trading you should ask your broker well about the margin of the stock. 

Is margin trading right thing to do?

Margin trading is a sword that works for two edges. In margin trading you can earn huge profit in few time with the help of less capital. And if the trade is predicted error then you can face a great problem. Let’s understand with an example:

Imagine you have 1 lakh rupees and you want to do intraday trading. Let company Y’s each share price is 1000 rupees and the margin for the stock is 10 times. Now you can buy only 100 shares. But as you get 10 X margin for the stock. So you can buy 1000 shares on the help of 1 lakh rupees for intraday trading. If company Y’s share price moves on 110 rupees/share from 100 rupees/share then what happen? So the invested ten lakh rupees moves on eleven lakh rupees. And if you sell it in 110 rupees/share then you will earn 1 lakh rupees.

So thus you can earn 100% profit on your capital in some hours. But if the share price goes to 90 rupees/share from 100 rupees/share then you will loose one lakh rupees. So thus you can loose 100 % of your capital. Margin trading is not bad or good. It fully depends on you and how you use it for intraday trading? If you use margin on margin trading without greedy after analyse any stock then it can be obviously good for you. But if you do margin trading without technical analysis then it may be dangerous for you. 

If you have any query related to What is margin trading please comment below so that the topic can be covered. Best wishes to invest. If you like the post please share the article about What is margin trading so that other can know about it and leave a comment.

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