Over time, an active investor will gradually build up their portfolio and increase their investing ability and risk appetite, allowing them to trade in considerable equity. In this scenario, they can invest large quantities in stock, allowing them to make a considerable earning even if they make say a 2% to 5% return. For instance, a 5% return on investment of 10 lakhs is about Rs 50,000. For those who are looking to start out in the stock market, however, and who are looking to invest a minimal amount of capital at first, these single-digit returns might not amount to anything significant.
Brokers have since identified this gap in the market and subsequently responded with the concept of margins and margin against shares. Margins allow investors to borrow additional funds from the broker in order to trade in the market. For instance, brokers might offer 5x to 10x margins. Meaning, if you have 5000 rupees to invest, the broker would offer you 10x of that. You can now employ the 50,000 to trade in the market, and upon completion can return the amount to the broker.
Margins Against Shares
Margins against shares are a form of margin offered by brokers that allow investors to borrow additional funds from them. As part of this policy, investors can borrow additional funds in the form of margins against shares. The stockbroker will loan you funds against the shares in your existing portfolio. In order to make a return on their investment, however, the stockbroker will charge interest.
There are a number of things to keep in mind while trading with margin against shares. This facility functions as a loan against shares, meaning that if you are not able to repay the loan, or return the margin borrowed, then the broker will have to recoup their funds from the collateral;i.e the shares you took the loan against. This is a key point to keep in mind while doing any kind of margin trading.
Another note to keep in mind is that brokers do not offer margins against shares amounting to 100% of the value of your portfolio. Additionally, margins offered also vary based on the broker you employ. Comparing depository participants to compare various margin against holding offerings and interest rates might be beneficial.
Conclusion
Margin trading is an effective way for individuals who do not have large funds at their disposal to trade on the stock market as they can margin against their holdings, allowing them access to excess funds that they can use to make higher returns. However, as with any other loan, a margin against holding comes with a certain level of risk. If your trades do not go favourably, your debt might end up digging into or neutralising your earnings.
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