Understanding Margin trading and Short selling

Intraday traders have many options to leverage their investments and maximize returns. For equity trading, experienced traders often use margin trading and short-selling. It could also be useful for novice investors to understand the differences, particularly for intraday trading.

Let's begin with the definitions. Next, we will explain the difference between margin trading or short selling.

Margin trading

Margin trading, in simple terms, allows you to invest more money than you have in your brokerage account or trading account .

This is also known as margin financing. If you have a margin account with your broker, you can do margin trading. This legal way to trade more stocks or securities at a fraction of their cost is called margin trading. Margin trading requires you to invest a certain amount of money, called margin money.

There are different margin requirements for currencies, futures and options. The underlying principles are the same: You borrow money from your broker to leverage and earn higher returns.

Let's take a look at an example.

Let's say you have a margin trade account with Angel One. You have 10,000 in your brokerage account. You wish to purchase 500 shares of Company XYZ, which currently trades at Rs. The lot will be Rs. 90 per share. 45,000 Your broker won't normally allow you to purchase shares worth Rs. 45,000 shares with Rs. You can have 10,000 in your account but you can also have a margin account.

The minimum margin required for shares is 20%. Intraday traders can purchase 500 shares for Rs. 9,999 But there's a catch. This trade must be closed or settled at the close of the settlement cycle. It usually takes 2 days from the date the trade took place.

You will need to pay Rs. You only have Rs. What do you do if you only have Rs. To square off your position, you will need to place a sale order for 500 shares within T+2 days. If XYZ share price rises to Rs. Your portfolio's value will increase to Rs. 115 if XYZ share prices rise to Rs. You will have made a profit of Rs. 57,500. After deducting the margin money that you paid to your broker, this trade netted 3,500 (Rs. (Rs. 9,000 = Rs. 3,500

If the share price of company XYZ drops or stays the same, you'll still need to close your position by the end of the settlement period. You will also have to pay your broker the margin amount. You will lose your position in that event.

To better understand short selling and margin trading, we will next learn shortselling. It is important to understand the differences between margin trading and selling if you are going to become an intraday trader.

Short Selling

You can short sell shares you don't have using a margin trading account to make a profit on falling share prices. Your broker may be able to allow you to sell shares of a company even if they are not in your Demat account.

Five steps can help you understand short selling:

1. Your broker will lend you shares and then he will sell them to you.

2. After selling the shares, he credits your brokerage account the money.

3. You can ask your broker for shares to be bought and then close your position.

4. Your broker may use the money in your brokerage account for the purchase of the same shares.

5. Your profit is the difference between the purchase price and the sale price after subtracting the margin money to the broker.

Margin trading and short selling both involve risk. Pro traders are not allowed to trade margin trading. Start small - learn, practice, and research before you can use these advanced techniques.