Margin trading is an OFT (office of fair trading) repeated term in the stock market scenario. In this article on learn trading you will come to know what this term exactly means and how this kind of trading is different from trading the usual way. Margin actually indicates the act of borrowing cash from your broker to invest in a stock.
The advantage of margin buying is that the investor or the stock owner will hold good amount of stock without even entirely paying for it. The risk will get divided. The broker usually lends the difference between the buying price of the stock and the portion you pay for it.
When you borrow money from your broker, there are conditions that you must fulfill. The stocks for which the broker is paying will be with him and he will have the right to trade them if the buyer is not able to fulfill the agreement made during the time of borrowing. The buyer will also have to pay an interest along with the normal fees of the broker. The best part about margin trading is that you reap the benefits in its totality. You will be entitled to get 100% returns in case of margin trading, whereas in normal trading it will be 50% since you will be paying the entire money.
However, margin trading may not be that profitable sometimes. If the price of the stock falls after buying, then you will face a loss of 100%. Moreover, you will also have the burden to pay off your loan along with interest to the broker. Even more, you also run the risk of unfulfilling certain conditions in which case the broker holds the right to sell the shares.
Certain terms and their usage will make this even clearer. Initial margin is a term indicating the part of the entire price deposited by an investor to open a margin account. This price is basically half of the overall value. The margin account needs to be maintained after opening it for future transactions. Maintenance margin is a term used to refer to marginal securities or a minimum amount of cash that needs to be maintained in a margin account to continue doing margin trading.
Another concept is that of margin call. This is normally done when you fail to maintain the necessary cash or security in the margin account. The broker will call you to deposit some more securities or money into your margin account. In case of failure to meet the obligations on your part, the broker holds the right to sell the stocks to compensate for the maintenance requirement. Learn trading to play it safe.