Online share trading gives you many investment opportunities to gain profit in the markets but at times you don’t have enough funds for the same. A margin trading facility can help you at this time. Buying stocks on margin allows you to purchase shares just by paying a small percentage of the amount
It may seem beneficial to buy stocks on margin. But margin trading comes with many risks so proper precautions needed to be taken before you start margin trading. Let’s understand which are the important things you should know before you start margin trading.
4 Most Important Things to Know Before Using Margin Trading Facility
Don’t Forget to Apply Stop Loss
Stop loss is necessary for intraday trading to avoid huge losses. So even when you do intraday trading using a margin trading facility, don’t forget to apply stop loss. You shall not wait for the right moment to apply stop loss.
In fact, stop loss shall be set while taking the trade position. In this way, you can reduce the chances of occurrence of heavy loss from trading. And this habit of stop loss shall be maintained in all types of market conditions.
Monitor Your Margin Trading Position
When you trade with a margin trading facility, take full responsibility for your trades. Don’t just blindly rely on your brokers. If you take the trade position then observe it on your own and close it within the pre-determined time limit.
Relying on brokers to close the position can be risky as they use programs to close the position. The programs may not be able to close the position at a good price. So you miss the opportunity to make a profit.
Risk of Leverage
Margin trading comes with the benefit of leverage but at the same time, it also has the risk of leverage. The leverage allows you to buy more than you can afford. This may put you in a situation where the stocks that you bought or took the position may not perform well.
Due to this, you may have to face loss at the cost of margin trading. So before investing in stocks through a margin trading facility, do proper research regarding the stocks. And analyze your risk appetite and invest or trade only to the extent of risk you can afford.
Avoid Too Volatile Or Too Static Stocks
Do you know the risk of volatile stocks or static stocks in margin trading? When you trade with margin funding, never invest in stocks that are too volatile or too static. Both scenarios are not good for you. A static stock doesn’t show many movements. On the other hand, the volatile stock carries the risk of volatility as well as Sebi at times imposes special margins for such stocks.
So in both cases, there is a risk involved of losing money. Therefore it would be advisable to not trade with both types of stocks in margin trading.
So are you the one who is about to start using a MTF? Then this article may have given you a good idea about what care to be taken before starting margin trading. By applying the 4 tips given in this article you can maximize the benefit of margin trading.