Article

Margin Trading
June 07 , 2012

In margin trading, you only notionally buy the share, in the sense that you reap gains when share price rises and pay up for losses if it falls. You are not interested in delivery of the shares to your account.

Say a Rs100 share can rise or fall upto 20% in a day. To notionally buy this share, you put up only Rs 20 to cover for a possible loss on the first day. If share price rises to Rs 110 on Day 1, you can withdraw the profit, keeping only the 20% cover for a possible second day loss. But if share price fell to Rs 90 on Day 1, Rs 10 of your cover has eroded, and you need to pay to replenish that immediately. If you don't, your position is closed; and you do not have the share (notionally) any more. This Rs 20 with which you are effectively holding the share and participating in its gain or loss is called margin. The activity itself is called margin trading.

Margin trading is not an activity to be done by beginners in the stock market. Indeed, it is debatable whether margin trading ever adds any value to you at all. Some have made spectacular profits once in a while, but it is like gambling in the casino. The only person who benefits consistently is not the player, but the casino owner (in this case the broker who earns brokerage from your trades)

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