Advantages and Disadvantages of Margin and Equity | Motilal Oswal

Advantages and Disadvantages of Margin and Equity

When you trade stocks and shares, you are trading on a stock exchange in direct equity. Equity, here, represents the shares of any company that investors may purchase, or sell. The transaction of buying and selling shares and stocks is called trading. Plainly put, traders try to buy shares at a low price and sell them later, or within the same day, for a profit. Investors may do the same, but may hold on to stocks for a long period, biding any volatility in the markets, till the value of a held stock rises. 

Trading requires investors to know about certain terms like margin and equity. This helps traders to learn how to trade and invest with some strategies in mind, and also to use tools  to calculate amounts needed to trade, like the equity margin calculator. It is easy to understand the differences between the concepts of margin and equity once you know about their definitions, and how they are used. 

Margin and Margin Trading

If you are a trader, you should know about margin trading, and what margins imply. The process of trading with a margin is quite simple. The first thing to do as a trader is to open a demat account linked to a trading account. After you do that, you can start your trading activity. When a trader wishes to trade a stock and buys stocks that they cannot afford, a margin account offers the funds for purchase of stocks. These margins are provided by brokers who simply lend extra amounts to traders to buy stocks. Shares that are bought are held by brokers as collateral, till loans are repaid by traders (borrowers). 

How it Works

The share market today entices traders to trade in stocks with enthusiasm. If you want to trade with a margin account, the process to follow is easy enough. First, you must request your broker to start a margin account. To do this, you have to make a payment to your broker, and this cash amount is known as the minimum margin. Margin amounts to be paid to brokers may be calculated with the use of an equity margin calculator. The calculator helps investors to compute margins on certain equities before they think of trading. If you are a trader, this helps you to know how much of a margin can be borrowed against a stock (equity) and what you need to pay back to your broker. 

Equity and Margin

Once you know the role of a margin and margin trading per se, you would also relate equity to this somewhat, and know how the concept differs from margin. Equity is the present value of your account (in terms of the value of the shares you hold), including any value pertaining to open positions. In simple words, equity represents your account balance with any additional profits, or minus any losses. When traders wish to trade in a certain company’s stocks,  they are basically trading in direct equity of that company. While determining what company’s stock to buy, through margin trades, traders may assess the company’s success with a gross profit margin formula. This formula tells traders about the gross profit that a company has made and its potential for growth in the future. 

Understanding Trading Concepts

When you open a demat account to start your collaboration with the stock market and trading, you should be well aware of the nuances of trading and the ways you can trade successfully. Traders must think long and hard before indulging in such trading with margins. Before you trade with enthusiasm, you should try more stable ways to invest, such as allocating your funds to any upcoming IPO

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