Understanding Margin Account
In the first half of 2021, India witnessed an investing boom. Furthermore, the number of retail investors has risen tremendously over the past few years. According to SEBI data, retail participation has increased to 45% in 2021 from 33% in 2016. Nearly half of the average daily trading volume of Rs 70,000 crore is being traded by retail investors. Amid growing interests, retail investors are exploring various methods to invest more and multiply their profits. One such effective way to buy more stocks is through Margin Trading. However, for trading in margins, you would need a Margin Account.
How does margin work in trading?
Margin trading is a type of investing style that involves buying stocks that are expensive and over your current budget. Through margin, you can buy stocks by paying only a small percentage of their prices, and the rest is provided by the stockbroker. This margin amount is then paid with interest back to the broker. Until then, the broker holds the securities as collateral. If the profit you earn through the sale of the stocks is higher than the margin amount, you earn a profit. If not, you incur losses after settling the margin amount and squaring off the stock positions. This is how margin works in trading and allows you to trade more than your current amount.
Understanding Margin Account
A margin account is a brokerage account similar to a Demat account that allows you to trade in margins. Depending on the market fluctuation and the current price of the bought stocks, your margin account can be referred to as ‘Margin Call’ or ‘Margin Excess’.
Margin Call: If the current value of the margin you took is lower than the loan amount given to you by the broker, your account may be referred to as ‘Margin call’. In this case, you will have to put in more money (either cash or by selling stocks) to increase the margin above the threshold limit.
Margin Excess: If the current margin value is higher than the loan amount given to you by the broker, your account may be referred to as ‘Margin Excess’. In this case, you can use the excess amount for other purposes, such as buying more stocks.
What type of Accounts can be opened as Margin accounts?
The two main types of margin accounts include:
Portfolio Margin Account: The accounts consolidate positions to lower the overall risk of the account. The account is permitted for derivatives where investors hold credit swaps, futures, and options.
Day Trade Margin Account: The account allows investors to buy and sell the same securities multiple times in a single day. The main objective is to book profits by taking advantage of the real-time price fluctuation.
Understanding margin accounts seems complex, but it is not. By absorbing relevant knowledge, you can understand the risk factors associated with Margin Trading before you begin your trading experience. You can always consult your stockbroker to know about the mechanics of margin trading and open a Margin account. With sound investment decisions, you can navigate profitably through margin trading and improve your portfolio’s value. You can avail of a margin facility up to 20x on delivery intraday, futures, options, currency, or commodity trading with an IIFL margin account. You can visit IIFL’s website or application to open an account and start trading.
Happy Investing!
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