Share Market

Margin trading is when you buy stocks without having full money for it. There exists certain method to buy stocks even if you don’t have the desired amount of capital for raising it which has been institutionalized through the futures market. The process is called margin trading.

Buying on margin is borrowing money from a broker to purchase stock. It is more like a loan from your brokerage. Margin trading allows you to buy more stock than you’d be able to in normal circumstances. To trade on margin, you need a margin account and it is very different from a regular cash account, which is used for trading using the money in the account.

Under law your broker cannot open a margin account unless you sign on it. The margin account may be a part of your standard account opening agreement or may be a completely separate agreement. To open a margin account you need an initial investment of at least $2,000. In certain cases, you need more. This deposit is known as the minimum margin.

Once the account is open and is operational, you can borrow up to 50% of the purchase price of a stock. This portion of the purchase price that you deposit is known as the initial margin. It’s essential to know that you don’t have to trade till 50% as you can borrow less like about 15% or 30%. It’s important to know that some brokerages require you to deposit more than 50% of the purchase price.

The margin trading can continue for as long as you want till the time some provisions are met. First, when you sell the stock in a margin account, the proceeds go to your broker against the repayment of the loan until it is fully paid. Second, there is also a restriction called the maintenance margin, which is the minimum account balance that is a must to maintain before your broker will force you to deposit more funds or sell stock to pay down your loan. This when happens is called a margin call.

Buying on margin is mainly used for short-term investments because the longer the period that you hold it for, the greater the return gets to make it even. If you hold an investment on margin for a long period of time then the profits that you will make on that stock starts flipping down.