WHAT IS MARGIN TRADING?
Margin trading is buying stocks without having the entire money to do it. The exchanges have aninstitutionalised method of buying stocks without having the capital through the futures market.
A method of buying shares that involves borrowing a part of the sum needed from the broker executing thetransaction. The collateral for the loan is normally securities in the investor's account. The investor mustdeposit an initial amount of cash(down payment called
or securities (initial margin or marginrequirement) into a margin account with the broker & can purchase stocks worth more, and must thereaftermaintain a minimum amount of cash or securities (margin) in the account as collateral (maintenance margin,minimum maintenance or maintenance requirement).
The broker charges interest on this loan(in addition to the commission on each buy/sell trade).The investorhas to keep the entire stockholding with the broker as collateral.
Also, the investor has to put up additional cash in case the value of the stockholding falls below a certainamount.
Margin trading is a double-edged sword
it cuts both ways. If the stock price rises, the investor makestwice as much profit with utilization of half(50%)borrowed funds as with his own cash only. Similarly, if the stockprice falls, the investor loses twice the amount. In slang, this practice is called 'investing on steroids.'