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What is Margin trading and its advantages and disadvantages
What is Margin trading?
IN margin trading, broker allocates more money (margin amount) to you to trade on day to day basis. In short for day trading broker provides facilitates you to trade more than your money available
in your trading account. This facility allows you to buy and sell more shares then with your actual money. The margin amount is only used for day trading and not delivery based buying or trading.
Suppose if you have Rs 5000 in your trading account then broker provides almost 4 times margin amount means you can do day trading till Rs. 20,000
Note - Margin trading also depends on share category on which trading is done and also on broker.
For example -
“A” category shares get full margin while “B” category shares get less margin and so on.
What are its advantages and Disadvantages?
Advantages of Margin Amount
1) Major advantage of margin amount is you can buy and sell (short sell) more shares than your purchasing power.
2) Some experienced traders make use of margin amount to do multiple trades taking very small profits and earn good profits in day trading
Disadvantage of margin amount
1) The major disadvantage is Time restrictions - If you use margin amount then you have to square off your trades before market closes, that is 3:30 pm, whether your trade is in profit or loss.
If you forget to square off your trade then you have to pay heavy penalty or some brokers charge interest rates on the margin amount.
So if you use the margin amount then you have the time restriction irrespective of whether your trade is in profit or loss you have to square off your trade because the margin amount is not your money its brokers money which is given to you only for a single day for trading.
We have also the information that even some trading terminals square off trades automatically before market closes if you use the margin amount.
Confirm from your broker about your trading account facility.
Biggest risk of using margin amount and for trading
If you are using margin amount for trading then you have to sell your trades before market closes irrespective of whether your trade is in loss or profit.
Avoid Margin amount -
If you do trading only by your available amount then you have the option of taking the delivery of shares if the share prices goes down. This also depends on brokers with certain rules so please confirm with your broker before taking any trades.
So if you avoid margin amount then you can avoid the major losses. So there is no harm if you don’t use margin amount.
It is not compulsory to use margin amount it is just an additional amount given to you for day trading.
If you don’t want to take high risk in day trading then you can avoid margin amount and trade only available amount in your trading account.
Basically it is very risky, especially if you are new and not experienced, to do over trading by using margin amount.
Once you gain experience then you can use margin amount and multiple your profits.
If you are new to day trading then start first doing
paper trading practice
and if you get success then you can start trading with actual money.