While purchasing shares, you would have to maintain sufficient limit so that the order value of the stock is fully protected. In case of selling shares, you need to have your Demat Account.
In the margin trading, a certain amount of fund is blocked which would not exceed beyond the extent of applicable margin percentage of the order value. Investors prefer to use margin money to increase their purchasing power so that they can have more stocks without even paying for it. But again there is some drawback in such a process in the sense that you would invite the risk of higher losses.
Let us understand the concept of margin in terms of shares -
1) How does it affect the leveraging process?
Let us suppose that a stock was brought at Rs 60/- and the price of the same rises to Rs 75/-. If there is the process of selling of such shares considering the involvement of cash, you will earn 25 percent.
On the other hand, had the stock been purchased on margin money utilising 1/3 of the stock price ( in this case, it will be Rs 20/-), you would earn a return of 75 percent on your money, which was originally invested.
But even it carries risk, there may be erratic movement of the price causing a sharp fall in its price. In such cases, the losses would be moderate, had it been purchase from the cash but buying the same on the margin money , the loss may even go to the extent of hundred percent.
2) Keep a track of additional margin requirements-
Your margin position is continuously reviewed and once the market to market( MTM) loss exceeds a certain threshold ( MTM), a call for the additional margin is made to compensate the difference.
In case, the limit is not sufficient enough to meet the call for the additional margin, the broker may not entertain your trading to carry forward.
Hence while some stocks are sold on the margin, ensure that your trading limit has not been fully exhausted.Additional margins are to be maintained at all levels so as to keep comfortable free limit.
3) Identify the Risks -
Margin trading involves risks and therefore it may not suit every investor. The following points need to monitored closely-
1) You can loose more money than other investors.
2) Don't over leverage your position.
3) You will have to square off your margin position sometimes.
4) You have thoroughly understood the trading practices of the exchanges.