What should you know about Margin transactions in stock trading?

2 minutes, 28 seconds Read

Basics of Stock Trading

Stock trading is the process of investors buying and selling stocks of a company listed in a stock exchange. The main goal of the investors will be to capitalize on the market by selling their stocks during a rise in the share price and to buy stocks when they are low. Stock exchanges are the marketplaces where the investors and traders do all the transactions with their shares and other securities. You cannot go and buy or sell stock directly in a stock exchange. You should consult with a brokerage firm that will work for you in the backstage to deal with the stock exchanges. It is enough for you to download a mobile application and open a trading account to see the listings of stocks and start your trading campaign. These brokerage firms will have some charges for their services in the forms of fees and commissions for every transaction. There are several types of accounts that brokerages provide to the investors. You can go with a cash account if you are looking for quick buys and sells. In case you are looking for withdrawing the amount during your retirement period, you can choose an IRA account. Apart from these two accounts, you can get an IPO margin account if you need to buy more stocks than you can afford. In this article, let us discuss the margin transactions of trading in brief. 

What are Margin Transactions

Margin transactions are all about buying more stocks than you can afford to. A margin account will let the investor borrow money from the brokerage firm and buy more stocks than his budget. There will be a small charge that should be paid upfront to the broker known as the Minimum margin. The investor should maintain this minimum margin throughout the session as losing the amount will cost him more to repay the amount borrowed from the brokerage firm. Most of the investors will go for margin funding when he needs some quick money and larger profits. If the investor is getting a 10 percent profit because of the trade done using the amount borrowed from the broker, there is an equal possibility that he will lose more if the happenings do not go in the right way. You should be careful while going for margin transactions. The drawback of margin funding is that the investor should repay the entire amount bought from the brokerage even he loses the bid in the listings. So, there will be a large profit or a huge loss for the investor going with margin transactions. 

Illustration of Margin transactions

Let us consider you have $100 and raise $100 from the broker to buy stocks for $200. If the stock price increases to $220 at the time of selling, you will repay $100 to the broker. Your profit will be 20 percent. But if the stock price goes down to $180, still you would have to pay $100 to the broker. So, your loss will be 20 percent.


David Cohen

Rachel Cohen: Rachel is a sustainability consultant who blogs about corporate social responsibility and sustainable business practices.

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