Margin trading is a trading which is in some aspects different from the usual trading. In margin trading an investor has an advantage to borrow some cash from his broker to invest in the stock market. Generally, banks and brokers fund the money in margin trading. One needs to have a margin account other than separate cash account from where the margin trade is done by using the money from that particular account. The best part in margin trading is that the investor has the honor to keep good amount of stock with him without paying the whole cost of which that stock is worth off. In this trading broker has to pay the amount by subtracting the amount paid by the stock owner from the total amount. While opening a marginal account an investor should be aware of and should read the agreement carefully including its implications. Every margin account agreement is not same so investor should know exactly what is written in the agreement before signing it with the broker.
Advantages of margin trading
Margin trading helps an investor to increase hi buying power when he is having less liquidity in his hands. This type of trading should be generally adopted by those investors who are experienced because they have the vast knowledge about the patterns of the stock market in different circumstances. Margin trading helps an investor to reap the benefits in terms of totality of cash, because the profit margin is 100% after paying just half of the amount. While in normal trading, an investor has to pay the full amount, so the profit margin decreases. Margin trading is beneficial for investors who deal in day trading as they get the opportunity to buy stocks with higher volumes for day trading. In margin trading, if the investor makes the right choice of stocks he will be able to make huge money and on the other hand if the wrong choice is made in stocks that may lead an investor in trouble as he will lose more than what he invested. Decision making power of an investor should be very good and factor of time constraint should always be in his mind while doing margin trading. An investor should have the proper investment strategy with continuous eye on the movement of stocks which will minimize his risk to a large extent.
Disadvantages of margin trading
Margin trading involves lots of risks so one has to be careful while dealing in margin trading. Margin trading proves to be a disadvantage for an investor when he is not able to return back the broker the borrowed amount from him. Then all the trading rights of the investor for trading goes into the hands of broker who has paid the amount for the stock. An investor has to return back the broker, amount which he has borrowed along with interest on that borrowed amount. We all know that with any kind of trading activities there are always uncertainties that follow them i.e. trading can be profitable or unprofitable. So, investor should always keep in mind that margin trading can turn out to be unprofitable also, and then an investor will be burdened to payback the actual amount along with the interest on that actual amount. In margin trading, it is always advised to a trader that he has to keep a minimum maintenance margin in his account. Margin call is another concept which is being followed by brokers, when an investor is unable to maintain the necessary margin in his marginal trading account. This is the time when the broker calls up the investor to deposit the required securities so that he can continue with the marginal trading and if he is unable to do so, broker has got all the rights to sell the stocks without the permission of the investor. As the prices of the stock go down the more investor looses the control on that particular stock. Margin trading is not done with all types of stocks, SEBI has approved some particular stocks which can be used in margin trading. An investor should put an investment of the amount which is affordable for him to lose as heavy losses can lead to serious crisis for an investor.