Know About Margin Buy and Margin Sell

Margin buy and margin sell are terms that have become essential to understand at present. Investors and traders can find more significant opportunities in buying on margin and selling on margin. It is upto you to decide which one you want to try on. 

But the first thing that comes to mind is to get the concept of margin to buy and margin sell cleared out. So, let’s discuss buying on margin and margin selling in a broader outlook. 

Benefits of Trading in Margin Products

Here are the benefits of trading in margin products.

• Investors with less money who want to take advantage of the market fluctuations over the short term should try margin trading.
• You can use securities in your Demat account as security/collateral.
• Margin Trading Facility (MTF) helps to improve the rate of return on your investment.
• You can improve your purchasing power using MTF.
• MTF comes under continuous monitoring by the regulatory body SEBI and stock exchanges.

What is Margin Buy and Margin Sell in Detail?

Here are the following: buying on margin and selling on margin in detail.

What is Buying on Margin?

Buying on margin means taking money from a broker for buying a stock; it is just like taking a loan. However, margin trading enables you to buy more stocks with a minimum amount. To perform margin trading, you need to open a margin account. It is just the opposite of a regular cash account which is helpful to use the money held in the account for trading. There is a need for your signature for a margin account opening as per law. A margin account can act as a part of your standard account opening agreement or an entirely separate agreement.

Buying on margin requires an equal deposit to a part of the buying price. You don’t have to ask for an advance to buy stock. There is only a need for a deposit to cover the margin requirement. 

Later on, you can take time to decide on buying on margin, which can be in part or whole; even there is a chance to pay the total purchase cost. You can use the margin when liquidity is present in the account.

A specific loan value for each stock plays a crucial role in determining a margin or loan for buying stock. Unfortunately, some stocks don’t come with any loan value right, while stocks have nearly 70% market value eligibility criteria.

If we talk about Canada and the United States, stock trading, which is more than $3.00, comes under eligibility for getting 50% loan value of market value. If we see generally, then stock trading, which is over $5.00 getting qualified for options, comes under the eligibility of getting 70% loan value. In contrast, some stocks don’t fulfill eligibility criteria, and you will see no loan value right. 

There is an absolute privilege to hold your loan until you want, but you must meet your obligations. 

1. Using a margin account, your broker will receive the proceeds against the loan repayment until it gets wholly paid after you sell the stock.
2. Make sure there is an overall net margin. Otherwise, you will have to sell your stock. It is known as a “margin call.”

Borrowing money doesn’t come without a fee, as there is an interest rate to pay. A daily calculation of the interest gets reflected in your margin account monthly. Therefore, there will be interest charges on your account; and they will be there till you pay. Otherwise, your debt level will rise because of the interest charges. 

There is a proportionally increase in debt and interest charges. Thus, it is better to buy on margin for short-term investments. If you hold your investment for longer, you will get a greater return. 

What is Selling on Margin?

Like you make payments on intraday buying, there is also a need for making payments on intraday selling. You can find an intraday open position, and there is a multiplication of risk when the price moves against. Here is an example of selling on margin. 

• You sell the stock
• There is an increase in the stock price.
• The risk associated with it will get magnified.

There is also selling on margin for the delivery segment. But, you have to do this through a complex process of stock borrowing called stock lending and borrowing mechanism (SLBM).

Buying and Selling on Margin Example

Here are examples of buying as well as selling on margin respectively. 

You purchase 1000 shares of A stock when there are not enough funds with you, while you sell 1000 shares of B stock when there are no stocks in your Demat account. There are payable margins in both cases. 

There is cash finding in buying on margin, while stock funding sells on margin. Intraday trading is a way to perform margin buying and margin selling. The upfront margins on buying are similar to the upfront margins on buying, where there will be average leverage of 4-5 times.

Conclusion

Collateral is marginable securities in the margin account that you have. Margin trading is a frequently used term in the Indian stock market. Deciding between buying on margin and selling on margin is completely up to you as per the strategy and benefits they provide. Moreover, both margins for buy and sell are available for intraday trading.

Frequently Asked Questions (FAQs)