What is Margin Trading?
Margin trading means share buying process by keeping certain margin (amount) with broker company. A margin account allows investors to borrow money against the value of securities in their DEMAT account. It basically helps increase investor’s purchasing power.
What is Difference between margin account and cash account?
A “cash account” is a type of brokerage account in which you pay full amount for securities purchased and you cannot borrow funds from your broker-dealer to pay for transactions in the account. A “margin account” is a type of brokerage account in which your broker-dealer lends you cash, using the account as collateral, to purchase securities (known as “margin securities”). Brokerage firms may allow you to have both a margin account and a cash account at the same time. Margin increases your purchasing power (leverage), but also exposes you to the potential for losses.
How does margin trading facility helps leverage your investment?
Let’s say you buy a stock for Rs. 100 and the price of the stock rises to Rs. 160. If you bought the stock in a cash account and paid for it in full, you’ll earn a 60 percent return on your investment (i.e. your Rs. 60 gain is 60% of your initial investment of Rs. 100). But if you bought the stock on margin paying Rs. 30 in cash and borrowing Rs.70 from your broker, you’ll earn a 200 percent return on the money you invested (i.e. your Rs. 60 gain is 200% of your initial investment of Rs. 30).
(For simplicity interest portion has been ignored in the above calculation)
What are the downsides of margin trading?
The downside to using margin is that if the stock price decreases, substantial losses can mount quickly. For example, let’s say the stock you bought for Rs.100 falls to Rs 50. If you fully paid for the stock, you would lose 50 percent of your money. However, if you bought on margin, you would lose more than 100 percent of your money. In addition to the 100% loss of your Rs. 30 initial investments, you would also owe your broker an interest and any charges on the margin loan. Investors who sets up margin account may, from time to time, be required to provide broker with additional cash or securities if the price of the stock falls (a “margin call”). If maintenance margin is not met, broker has the right to sell client’s securities that were bought on margin, without any notification and potentially at a substantial loss to the investor. If broker sells client’s stock after the price has plummeted, then client would lose out on the chance to recoup his/her losses if the market bounces back.
What is margin call?
If the margin equity in your account falls below security requirements, then your account is issued a margin call. If your account is issued a margin call, you must deposit more money or securities in your account.
If your account falls below the maintenance requirement, you will be asked to deposit more cash or securities into your account. When a margin call occurs you generally cannot purchase any additional securities in your account until you satisfy the margin call requirements. If you are unable to meet the margin call, your securities will be sold to increase equity in your account up to or above the maintenance requirement.
Do I have to pay interest for limit I have obtained?
Like all loans, margin loans charge interest and other service charges. This cost directly reduces your return on investments, increasing the amount your investment needs to earn to break even. Interest rates are variable and for more details on current interest rates please visit Nabil Stock Dealer Office at IJ Plaza Durbarmarga, Kathmandu.
Things to know before starting margin trading.
- Client can lose more money than he/she have invested.
- Client may have to deposit additional cash or securities in his/her margin account on short notice to cover market losses.
- Client may be forced to sell some or all of his/her securities when falling stock prices reduce the value of securities.
- Broker may sell some or all of client’s securities without consulting to pay off margin loan.
- Client is not entitled to choose which securities the broker sells in accounts to cover his/her margin loan.
- Broker can increase its margin requirements at any time and is not required to provide you with advance notice.
- Client is not entitled to an extension of time on a margin call.
How can client protect himself / herself?
- Knowing how a margin account works and what happens if the price of the securities purchased on margin declines.
- Understanding that broker charges, you interest for borrowing money and how that will affect the total return on your investments.
- Being aware that not all securities can be purchased on margin.
- Asking broker or financial advisor, whether trading on margin is appropriate for you based on your financial resources, financial goal, investment objectives, and risk appetite.
Which securities are eligible for margin trading?
Securities are eligible for margin trading if the following criteria is met.
- Minimum of 10,000 shareholders of the stock.
- The net assets of the company should not be below the paid-up capital.
- Minimum dividend of 10% in last two fiscal years.
However, Nepal Stock Exchange (NEPSE) publishes list of securities eligible for margin trading from time to time. The list can be viewed from https://www.nepalstock.com/downloads. Similarly, Nabil stock dealer will also provide the list of stock eligible for margin trading.
How can I start margin trading with Nabil Stock Dealer ?
First of all, after you visit our office, we will together go over if margin trading is suitable for you. If you agree and understand what margin trading is, we just have some paper works and some documents requirements, and then your margin account and limit will be established. After this you can trade on margin based on limit and boundaries of margin trading agreement.
