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Margin account
When you open a trading account with a brokerage firm to buy and sell shares, you have two options – a margin account and a cash account. A cash account is relatively simple: you pay for whatever you have bought, and the broker gets a commission from your transactions. A margin trading account is different in that you don’t pay cash upfront for any shares that you buy. Instead, you only deposit a percentage of the transaction; the rest is a loan from the broker.
Fill the Account Opening Form.
Submit proof of address and residence like PAN card, Aadhaar card, passport or voter card.
A company representative will do the verification either in person or on the phone.
You will also have to sign a 'Rights and Obligations' document.
After that, you will be given a login ID and password.
You will now be able to access your account to do margin trading.
| Shares | Futures |
|---|---|
| You have ownership of shares while margin trading, so get the benefit of dividends, | No ownership of shares. You make profits from changes in prices |
| Margins are higher, at around 20-25 percent | Margins are lower in the case of futures trading, 10-15 percent |
| There is no mark-to-margin while determining margin calls in case of unfavourable price movements | Margin calls depend on mark-to-market (MTM) – futures are valued daily at market prices, and margin calls will rely on MTM value |
| You have to pay interest on the amount funded by the broker | There is no interest payable in the case of futures trading |
| Positions can be carried forward for an unlimited period | Positions can be carried forward for a maximum of three months |
| You can use margin trading in any stock you want, subject to a few restrictions | Futures trading is available only on certain stocks specified by the stock exchange |
| There is no minimum lot size | The minimum lot size is Rs 5 lakh. |
Margin trading in commodities
Margin accounts are also available for trading in commodity futures and options in commodity exchanges like the Multi-Commodity Exchange (MCX). Margins are generally much lower in commodity trading – they could be as low as 3-5 percent.
This means that traders can take significant positions in commodity futures and options through leverage. As we have pointed about leverage offers considerable scope for profits, but also leaves you open to huge losses. This is particularly true of commodities, whose prices tend to be very volatile compared to stocks.
Types of margins
Margins are calculated in different ways on the cash market segment of stock exchanges. These methods include Value at Risk (VaR), Extreme Loss and Mark to Market margins.
- VaR margin: This is the most common method used. Here, we estimate the probability of loss based on historical price trends and volatility of the stock. It covers the most considerable percentage loss that can be incurred by an investor for shares on a single day with a 99 percent confidence level.
- Extreme Loss margin: This is a margin that covers expected losses in situations that lie outside the coverage of the VaR margin.
- Mark-to-Market margin: MTM is calculated on all open positions at the end of the trading day by comparing transaction price with the closing price of the share for the day.
Is margin trading right for you?
When you open a margin trading account, you should consider if it is suitable for your needs and investment goals. Indeed, there are many advantages to margin trading. The leverage offers considerable scope for profits and losses. You should go into it if you have a high tolerance of risk, the ability to keep your cool in volatile situations, and not go overboard on leverage. Margin trading is not suitable for conservative investors with a low tolerance for risk.
Margin trading is particularly suitable for short-term trading in favourable conditions. Suppose you have reliable information about a company that could affect its share prices. Margin trading will allow you to get higher exposure in that company so that you can make much higher profits. It’s better not to use the margin trading account for long-term speculative trades.
Under Securities & Exchange Board of India (SEBI) guidelines, only corporate brokers with a net worth of Rs 3 crore are allowed to offer margin trading facility to traders. With the best-in-class services & technology and also an excellent net-worth Angel One is your best choice. So, go ahead and open a margin account with us today!
How does margin account work?
Margin account let you leverage, that is if the margin is 10 percent you can invest up to 10 times the deposit in your margin account.
How much money do you need for a margin account?
Initial margin: It is the minimum amount, calculated as a percentage of the total investment amount. The broker will use the initial margin to fulfil the full settlement obligation.
Maintenance margin: It is the minimum amount that the client needs to maintain in the margin account, calculated as a percentage of the market value, as per the latest closing price, of the securities forwarded as collateral.
Please ask the broker regarding how to open a margin account and details of the costs associated with it.
Which is a better cash account or margin account?
A margin brokerage account is a unique feature that allows traders to amplify their investment capacity against a broker forwarded loan amount, usually a multiple of the initial deposit. It allows traders to bet for larger trade volume or short sell to earn a profit.
Is a margin account a good idea?
Does a margin account affect credit score?
Margin account will only affect your credit score if the assets/securities in your margin account dissolve and you can’t repay the loan.
With margin account explained, open your margin account with Angel One and enjoy its benefits.
