| |
| An investor has the option of either opening a:
|
| |
| Cash Account, or a
|
| |
| Margin Account
|
| |
| The only difference between both these accounts is that, you have to remit the entire value of the purchase into the broker`s account in case of a cash account, and as far as the margin account goes, an investor can borrow up to half the value of purchases from his broker against a collateral, which is the stock the investor is planning to buy.
|
| |
| The procedure is very much like how you pay interest on a loan, a margin account holder is also liable to pay the mandatory rate of interest on the borrowed sum, even in the face of plummeting value of his investments. Click here to view a flow chart on margin trading.
|
| |
| For instance, considering that you are buying stocks worth Rs 10,000 and you bought the same in a cash account, you would have to pay the entire sum yourself. And in case you bought the same stock in a margin account, you would be eligible to take a loan of Rs 5,000 from your broker, towards which you would have to pay interest.
|
| |
| Assuming that the interest charged by your broker is 10 per cent per annum and you pay back your broker in six months. At the end of these six months, you will have to pay your broker the principal amount of Rs.5,000 and a basic interest of Rs.250.
|
| |
| It is not all that simple as it appears to be, an individual need not necessarily have only investment in a single stock, and it need not be that the individual makes all the investment at a single point in time or it may not happen that the scrip books profits all the time or vice-versa.
|
| |
| It is highly likely that an individual has a whole lot of investments procured over a period of time. Therefore, the loan from your broker is repaid as and when you start selling your investments, and the returns from the same are diverted towards this repayment till the time it is completely repaid. To worsen matters, if the sale of your investment is not bringing in enough money to pay back the broker, you will have to bring in money from other sources.
|
| |
| If you are using a margin account and your stock prices increase, then it is a win-win situation. The problem arises when you are using a Margin account and your stock prices decrease, this may result in considerable losses to you.
|
| |
| On the basis of the above example, if the stock you invested in rises to say Rs.15,000, and you have brought the stock in a cash account, you pay the broker in cash and earn a 50 per cent return on your investment. If you brought the stock in a Margin account, you would have earned 100 per cent returns on the money invested. Of course you would have to pay back the money borrowed along with the interest.
|
| |
| The status of margin trading in India is not very encouraging, even after the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) have approved the necessary norms to facilitate the same.
|
| |
| However, in view of the growth in futures, margin trading has not been able to attract enough attention in India. The reason for the same can be attributed to lower margin requirement in case of derivatives.
|
| |
| For instance, a broker is required to pay approximately 10-15 per cent margin for stock futures in comparison to 40 per cent for margin trading.
|
| |
| To further aggravate the situation, commercial banks have been shying away from funding Margin trading. Considering the overall scenario it would be some time before margin trading actually catches on to the broking community and the investors alike. |
| |
|
| |
