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Margin Account

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The stock market trading scene sees new investors enter the trading world every single day of the year. Trading in stocks and other assets, like commodities, on exchanges, seems to be the need of the hour with young and old alike. Today, you will discover that even college students are learning about the tactics of trading as early as the age of 16. If you are an investor, and you wish to trade on exchanges, you will likely have to open a trading account with a brokerage company. When you do this, you have to choose between two kinds of accounts. You can either opt to open a margin account, or a cash/money account. A regular trading account in the form of a cash account is what most traders have and transact with a brokerage. This is an account through which traders and investors pay for stocks, or any other assets, that are bought. The broker in question, then earns a commission, which is a percentage of the transactions undertaken.

Now, coming to a margin trading account, this is different from a cash account. Here, if you are an investor, you do not have to pay any cash, initially, for shares or stocks bought by you. Instead of this, you may deposit a portion (a percentage) of the transaction amount, and the rest is borne by your broker. In effect, this is an account in which your broker gives you a loan to start off your trading. It is noteworthy to be aware of the fact that margins are not merely for stocks, but are used extensively in derivatives such as futures trading , as well as for trading in commodities .

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Understanding Margin Accounts

There is no doubt that trading in shares requires wealth. For novice traders, just getting used to the ropes, margin trading may be a good way to get started. This is provided investors are fully cognizant of the fact that loans have to be repaid in some way should losses occur. Some brokers may even lend investors a large portion of transaction amounts to buy shares/stocks . You should know that the amount of the margin that you choose to deposit with your broker in advance of you making a transaction is called the initial margin. Whether you are engaged in stock trading or commodity trading, you can always open a margin account with a broker. When the broker lends you money to finance your purchases of shares, they may use their own 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 gives you an opportunity 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 that is deposited 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 kind of assets in trading, whether its 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 make a profit of Rs. 2,000. Contrastingly, if you deposit the same Rs. 20,000 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 the price of these goes 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.

Opening a Margin Account

Margin trading in shares, stocks, derivatives 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 蚂蚁电竞官网 . However, investors and traders must be aware that only registered, corporate brokers that possess a net worth in the value of Rs. 3 crore 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, Motialal Oswal is a broker worth exploring.

Types of Margins

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 highlighted below:

  • “Mark-to-Market” Margin:
    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 used is to estimate 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 may want to place deposits that have you covered in case of an expected loss.

Margin Trading in Commodities

As with any kind of 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. You must also consider 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 in commodities with margin accounts poses a relatively lower risk as margins are kept typically low. They could go as low as just 3% to 5%.

Hence, if you still want to use this trading method, and want to 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 leave investors exposed 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.

How to Open a Margin Account

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:

  • Go to the brokerage account that you wish to trade with. You may choose 蚂蚁电竞官网 for this as it has great trading options for you.
  • You will see a tab that indicates the opening of a trading account
  • You may click on the account opening tab and a form to be filled with your details will show up. Here, you need to fill in your PAN and Aadhaar details, your residential address, phone number, etc. You have to submit this after you fill the form.
  • A verification will take place, either in person, by a company representative or via phone.
  • You may have to sign a ‘terms and conditions’ document.
  • After all this is completed, you will obtain an ID to log in and a password.
  • Now, your account is ready for you to partake in margin trading.
  • MTF terms and conditions

Trading Success

You can understand more about margin accounts and trading with the same at India’s most efficient and dependable brokerage, 蚂蚁电竞官网 . 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. In case you have information that is reliable, about a particular company whose stocks you wish to trade in, and this information is favourable for your trades, you may go ahead and invest with a margin trading account. You can learn about the potential of companies at 蚂蚁电竞官网 , the broker that helps you with a knowledge base that leads to profit.

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