The process is fairly simple. A margin account provides you the resources to buy more quantities of a stock than you can afford at any point of time. For this purpose, the broker would lend the money to buy shares and keep them as collateral.
In order to trade with a margin account, you are first required to place a request with your broker to open a margin account. This requires you to pay a certain amount of money upfront to the broker in cash, which is called the minimum margin. This would help the broker recover some money by squaring off, should the trader lose the bet and fail to recuperate the money.
Once the account is open, you are required to pay an initial margin (IM), which is a certain percentage of the total traded value pre-determined by the broker. Before you start trading, you need to remember three important steps. First, you need to maintain the minimum margin (MM) through the session, because on a very volatile day, the stock price can fall more than one had anticipated.
For example, if a Tata Steel stock priced at Rs 400 falls 4.25 per cent and the IM and MM are 8 per cent and 4 per cent of the total value of the shares bought, respectively, then the trade-off 8%-4.25%=3.75% will be less than the MM. In this case, you will either have to give more money to the broker to maintain the margin or the trade will get squared off automatically by the broker.
Thank you for your explanation. So what do you think about getting profit from margin trading? I mean like we can use it for long term or short term trading, or when the fundamental is good or poor? I usually margin when the volume is high. But several times I got a margin call because of dump or pump immediately.
