Margin trading in the stock market has been gaining popularity for some years. If you are unknown to this term then you are in the right place. In this article, we will discuss about the margin trading in stock market;
What is margin trading in stock market
The act of borrowing money from a broker to buy stocks is known as margin trading. The amount you borrow from your broker to invest in a certain stock or investment is known as stock margin. The amount of margin you can use is determined by the stock and your broker. Through this process, investors can increase their purchasing power by acquiring more shares than they can afford to buy with their own money. The purchased equities serve as collateral for the borrowed money. This money is referred to as margin loans.
How does margin work in stock market
Let’s say you have ₹10,000 and want to purchase Stock A, which has a share price of ₹100, for ₹20,000. You can borrow the remaining ₹10,000 from your broker and use ₹10,000 of your own funds to invest in Stock A. Thus, you could purchase 200 shares of Stock A and turn that stock into a ₹20,000 investment. Your account balance would be ₹20,000 (stock worth) – ₹10,000 (broker loan) = ₹10,000 as a result. In the event that Stock A rises from ₹100 to ₹110, it indicates a 10% increase in value over the initial amount you paid for the stock.Your 200 shares are now worth ₹22,000 as a result. Your account balance would therefore be ₹22,000 (stock worth) – ₹10,000 (broker loan) = ₹12,000 as a result.
Advantages of margin trading in stock market
- Stock margin increases leverage by enabling investors to purchase higher quantities with less sums.
- This can enable individuals to benefit from even slight positive market movements even though they don’t have much money in their trading account.
- It assists investors who lack the money yet would like to make short-term investments.
- For instance, to enter positions during advantageous shifts in the market.
- Stock margins let you allocate funds to a wider range of assets. It helps you diversify your portfolio.
- Margin accounts let you short sell, which is the practice of borrowing and selling stocks to profit from declining prices.
FAQs
What is margin in the share market?
Ans. The amount you borrow from your broker to invest in a certain stock or investment is known as stock margin.
How can I calculate margin?
Ans. The number of shares multiplied by the price plus the margin rate yields the stock margin, or the margin needed to purchase a stock.
