Wednesday, 4 June 2008

Margin and a day - I

Warning: Cigarette smoking is injurious to health.

Please don't mind the relation between margin trading and cigarettes - I am in a habit of deriving inferences from real world entities. As I have clarified earlier, my writings are for those who are new to Equities and Futures. That's why a cigarette.

There is a theory revolving risk and profit. The more risks you take the more profit you make. Or in simpler words, or for the lack of better words - No risk No gain!!!

Warning: I am in no way trying to convince you to indulge in Margin trading.

What the heck is "Margin Trading" - I just heard you say. So, here you go. We have a very smart exchange called NSE(National Stock Exchange) that has most stocks available to trade in margin. It makes sure that the stocks are good and they have a proven track record of NOT killing their investors. So, in a way they have taken the very first step for you. These stocks are not of any fake company, they are perfectly real.

Lets take a simple example to explain this concept. Suppose you want to buy shares of a company called XYZ. The price of a single stock of this company is at about 1200. To make some generous investment you would like to have at-least 50 shares of this company. It amounts to: 1200*50 = 60,000. But, didn't I just say that my target audience are novice? So I can't expect them to shell out(read: Risk) this relatively large amount of money at once. NSE and other major exchanges in the world are very much aware of this fact, that's why they have devised many investment/trading instruments. In this concept of margin trading they don't expect you to give them the entire amount, but a margin.

So, if the margin of this stock at NSE is 21%(it usually ranges from 21% to 35%) you need to pay: 0.21*60,000 = 12,600. The riskier the stock the more the margin.

Great. So you just started off with 12,600 taking a position on about 50 shares of a coveted company.

Dude, I have 12,600 and I now want to trade. But how? Do I have a platform? Yes. There are many like ICICIDirect, Reliance Money, and ShareKhan called De-mat account providers. To get started, you need to open a De-mat account to trade stocks and invest in stocks. PAN card is mandatory these days.

Bloke, you just said "position" whats that? Is it another of your jargons? Or just a position? Doesn't make much sense to me. Grasshopper, don't worry I am coming to it. Its a jargon, and we "take" a "position". You can either take a "short" position or a "long" position.

When you buy a stock you are said to have taken a "long" position, and when you sell you take a "short" position. Its at the center of all the trading and investment strategies. So, its a very important concept.


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