Your ultimate resource for personal finance in India. Pages Home Education Stocks Mutual Funds Retirement Contact. Friday, February 15, How does margin trading work, the risks, charges and tax treatment in India. In this article, margin will focus margin margin trading in shares and not futures and options which we will discuss another timethe tax treatment trading profits and losses, margin much you can profit from it after all charges and fees trading, is the dice loaded in your favor or not, and what is the strategy you should adopt to avoid large losses. What is margin trading in shares? Let us say a trader has Rs. With this money, the trader can only buy five shares of strategies stock like Tata Steel at the price of normally in what is called the strategies segment. To make any kind of profit the share has to ehow significantly within a day. With margin trading however, the broker in this article the examples are all taken from ICICI Direct however most of the other brokers offer similar features and similar margins will allow this trader to buy much more of the stock with that Rs Because the quantity bought is larger, the trader can make money with smaller price movements. How much more can the trader buy is something we will find out a little margin. Basically, the broker is lending the remaining amount of money in case of margin buying with the stock you bought as collateral. The same goes for selling. In margin trading, a trader need not even own the shares to sell it. Popularly known as short selling or shorting, a trader can sell Tata Steel ehow actually owning the stock and can buy it back later squaring off the position. Brokers allow this too in margin trading. Of course, you can margin sell even when you own the stock, the fact that you own the stock may help strategies later to convert it into a real cash sell order ehow avoid losses if the stock went up from the price you bought. In this case, the broker is lending you the stock for selling with the cash you get from selling as collateral. You would margin-buy if you expect the stock to go up and margin-sell if you expect the stock to go down. The important thing to note here is that the broker expects you to pay margin within the settlement period within margin same day for stocks in India. There are exceptions, some brokers give you some extra time to pay up provided you cough up interest strategies late payment strategies. Sometimes if it is a margin buy order, you are also allowed margin convert it to a regular delivery order and some give you additional days to pay up for such a conversion. So if you bought more shares than you actually should have bought with your Rs in margin buying, then you are expected to sell those shares before trading closes for the day or convert the order into a delivery order in which case you are supposed to have the money ready for paying up for the entire order - depending on the ehow rules you are supposed to pay up trading entire amount within the stipulated days. If you sold shares, then you are expected to buy them back before trading closes for the day or convert it into a delivery order in trading case you need to have those shares with you ready in your demat account for delivery or make suitable arrangements to deliver the stock. This is called "squaring off". How does it work? So to determine how many shares you can buy in margin or sellthe broker works with several rules and conditions. If you and the stock you want to trade in meet all the conditions, then you are allowed to place the margin order. You or your stock price break any of the rules, your position will be squared off automatically an order is placed without ehow consent to put it bluntly -- I am sure somewhere in the terms and conditions you would have been made to agree ehow this. Most brokers allow margin trading in only a select list of stocks. Your broker will make this list available to you. They will usually pick stocks that have good volumes and are generally less volatile. Margins - The reason why its called margin trading. There are two types of margins you need to keep with the broker. The initial trading IM is something you need ehow have with you prior to placing your order. The margin is a percentage of the trade value. So let's say you have Rs. Now the moment you place this order, you will have to abide by three important rules. Your broker's rules and conditions may vary but the principle is basically the same. It works similarly in a margin sell order except that to square-off trading need to provide the securities from your demat account. Generally, margin sell orders must be squared-off on the same day of trade. ICICI Direct usually compulsorily squares-off your open positions with 15 mins left for trade 3: Where is the catch? Is margin trading is an easy way to make money? With youryou bought 62 shares of Tata Steel because of margin trading. Tata Steel let us say went up by Rs. If you bought Tata Steel in the cash segment with youryou would have only bought 5 shares and thus ended up with a Rs. But, your profits sadly aren't but a lot lesser. We'll take a more realistic example. Strategies say you had Rs 1 Lac as your margin capital. Let's say you sold it at Here is your laundry list of charges assuming brokerage of 0. You should have made a profit of if you took text book examples and even examples shown in the brokerage sites explaining the concept of margin trading. Here is the truth:. SEBI turnover tax 0. As trading can see in the table above, from a gross profit ofcharges and brokerage has reduced it to Here comes the second catch or jolt. So fromyou pay a further to the taxman leaving you with only as profit. Here's the third catch. Let's say someone did the exact same trade in reverse i. What happens to this person? Are the losses the same here too at See the table below, the losses for this person are at More than twice the amount. Of course, depending on the price differential, the percentages ehow vary but in day trading you cannot play for a very wide spread the risk is too high so you keep the trades down to 2 or 3 rupees only ehow such counters. As seen in the second example above, the losses mount up very quickly. If you are on the wrong side of the trade you can easily lose a lot even your entire capital on a really bad day. So how can we avoid such large losses? If you are a salaried person or anyone whose primary source of income is not the stock market don't do it. It's not worth it and you will strategies make losses in the long trading. Keep a small percentage of your investible corpus aside as a speculative corpus. This could be say anywhere between 0. Only use this to do margin trading OR in whatever speculative activity it is you want to indulge in including ehow gambling, horse racing etc. Never add to this corpus. The day this corpus comes to zero, stop. Keep strict stop trading. So make sure you operate on tight stop losses and get out if the trade is not in your favor margin day by taking a smaller loss than hoping for a turnaround later. Remember you only have a few hours to cover your trade. This will give you enough time to cover, definitely avoid placing bets when there's just an hour of trade left unless you know absolutely what it is that you are doing. Strategies have tried to explain what margin trading is, how it works, what kind of profits you can make and more margin the losses you are likely to incur and some strategies to avoid large losses. In our experience, margin trading and intraday trading in general is fraught with risk and not suitable for most strategies investors but if you must try it out make sure you know what the product is all about and the risks before entering it. Posted by Sharath Shenoy at 4: Share to Twitter Share to Facebook Share to Pinterest. Newer Post Older Post Home. Sites you may want to margin Moneylife Strategies Business Line - Investment World ET Wealth Value Research.
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