Many investors stay away from margin calls for a good reason. These calls have the potential to bankrupt you or make you into a multi-millionaire. You may find that many brokers actually try to tempt new investors with margin calls and often they are successful in their endeavors. However, it is best to understand margins so that you can decide if it is the right investment strategy for you.
Understanding Margin Calls
Under normal circumstances, when you want to buy stock, you use the money that you have in your account. If the same stock’s price increases, you can sell the shares and make a profit. The percentage of your profit can be calculated by dividing the profit by the amount you have invested. If you deduct the brokerage, then you will get the net profit. That is how it usually works.
On the other hand, if you choose margin trading, you buy stocks that you do not have the money for. Here, the brokerage will lend you the money that you can then use to buy the stocks you want. The amount that you receive varies from broker to broker, and usually, it is dependent on the amount you have in your account. The money that you invest through your account is known as margin while the money that the broker lends you is known as levered or borrowed money.
The benefit of using margin calls is that you will be able to buy more shares compared to using just your own money. And, if the price of the shares increases, you will make a higher profit. That will automatically increase your profit percentage by quite a bit. The returns can be magnificent if you go with margin calls. The kind of profit percentage you can make can be mindboggling.
Of course, you need to realize that there is always a catch. If something feels too good to be true then you should always take the next step with caution.
Why Do Brokerages Encourage Margin Calls?
You may be wondering if margin calls are risky then why do brokerages promote them among investors. Well, the answer is very simple. They benefit from the brokerage charges that they levy on your transaction.
In margin trading, the brokerage charge is not on the margin amount or the money you use from your own pocket. The brokerage is charged on the whole amount, which is the borrowed money plus the money from your account. When the brokerage charges you for the transaction, it can be a significant sum.
The Risk of Margin Trading
Imagine that you use margin calls to buy shares, assuming that the price will increase. However, if the stock price tanks, you will incur a loss. Whether the stock price increases or dips, the brokerage will still levy their brokerage but you will suffer a loss.
Stock market investing is risky as things can go wrong without notice. That is why experts tell new investors that besides learning demat account meaning, they should also learn about the market fluctuations that are governed by external factors. Even the best trader can end up losing a significant amount of money, especially if your brokerage leverages a high amount.
Margin trading tends to magnify your profit or loss, and if a broker leverages large amounts to all the traders using their platform, it can lead to a significant loss. When that happens, it increases the likelihood of the broker defaulting on the payments. This is something that has happened in the past so investors should not ignore the risks involved.
In Conclusion
As you can see, margin calls are truly double-edged swords. They have the potential to make you tons of money and at the same time, there is a risk of losing all your money. So, understand the risks involved and then decide whether margin trades are right for you.
Investing in stocks has always been an attractive option for many folks. Before choosing to invest in stocks, there are various factors to take into account. Before making investing selections, investors need to assess their risk appetite and personal objectives.
In addition, a thorough understanding of the company, its finances, competitive landscape, and market conditions will help you choose the right stock.
oday, with the help of an online trading platform, individuals can execute trades quickly and securely, wherever they are in the world, without the need to visit a trading house in person.
However, to trade in the market, the only prerequisite is to open Demat account and a Trading account.
Opening a Demat account is not as complex as it might seem.
However, since it involves money, you can research the process, the documents required to open Demat account, and the rules and regulations involved.
Various problems can occur during the process; thus, it is essential to know how to avoid them.
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