Margin Equity: Margin trading is a facility where a person buys stocks that are beyond the budget just by paying some margin amount which can be eit
Margin trading is a facility where a person buys stocks that are beyond the budget just by paying some margin amount which can be either in cash or shares as security. The rest amount will be funded by the stockbroker.
Margin trading utilizes the concept of leverage. Under this one can borrow the money to purchase more stocks and potentially to make more money out of investments. But if we specifically understand the concept of leverage it is a risky process to go for. You might make money if you are willing to take the risk, but it can also be the other way round and one can lose as well if the stocks are not picked rightly.
Concept of Margin Equity
Margin equity is the amount that one can hold in the brokerage margin account in the form of cash or securities, after specific deductions. In margin trade, one can buy double the stock they can actually afford. Let’s say Mr. X has decided to go for margin trade and wants to buy stocks for Rs. 5,00,000, so he has to only invest Rs. 2,50,000 and the rest he can borrow from his stockbroker under margin facility.
Working of Margin Equity
It is best to understand all the financial workings and calculations before investing and opting for any type of facilities provided by stockbrokers. Margin trade working is explained below:
Mr. X is a regular trader in the stock market. He has Rs 1,00,000 and the stock he wants to buy is Rs. 1000 per share, Mr. X purchased the 100 shares of that particular stock. After two years, the price of the stock rises to Rs. 1200 and Mr. X decides to sell all his shares for Rs. 120000. This shows Mr. X makes a profit of Rs. 20,000 on his initial investments. Simply trading in the stock market works like this.
Now, assume the case of margin trade. Mr. X wants to buy 200 shares of a particular stock. The price per share is Rs.1000. This means the total investment is Rs. 2,00,000 but Mr. X has only Rs. 1,00,000. Now the margin trade comes in the picture where Mr. X can put Rs. 1,00,000 from his end and borrow another Rs. 1,00,000 from the stockbroker to buy 200 shares of Rs 1000 each.
Therefore, the total investment is Rs. 2,00,000. If Mr. X executes the margin trade and sells all his shares at Rs. 1200 each he will receive Rs. 2,40,000. Here, Mr. X is making a gain of Rs. 40,000 but on a margin trade. Now, Mr. X has to pay back the Rs. 1,00,000 he borrowed from the stockbroker plus interest on this amount as stated by the broker. Mr. X will earn a small profit of Rs. 40,000.
Sounds decent right, but it is not always the case you might end up in losses. This is the demerit of margin trade. One can lose immensely if the price of the stock falls to ascertain level. However, one can use a similar trading account for margin trading.
Margin Equity Investments or trade can be an add-on way to create wealth. Let’s look at this way of enhancing your current trades rather than you taking debt which is not the right way. It is true all investments come from risk but taking debt for the same is not justified at any point. Investments take time to grow, apply the right strategies, pick the correct stocks and keep a track of your investment performance. You will certainly grow your wealth but margin trade is not the only method to do that.