Prajna Capital - An Investment Guide

Margin trading increases your buying power, but it enlarges your risk as well. When to give in to the temptation of this high-risk trading strategy, and when to avoid Double gain; Double pain. This is how the concept of margin trading can best be described. As the name suggests, margin trading enables you to trade with borrowed funds/ securities or, in other words, by paying only a part of the total investment amount. It is, in fact, a leveraging mechanism which enables you to take exposure in the stock market over and above what is possible with your own resources. However, while margin trading increases your buying power, it enlarges your risk as well. In a way, amplifying your gains and losses to the same degree. That is why it is still not a recommended way of trading, although the lure of big money has always drawn investors into the lap of margin trading. So much so that an increasing number of small investors are now giving in to the temptation of this high-risk trading...

IT WAS greed that got the BSE Sensex to 21,000 points. Investors were willing to pay any price for a stock expecting that stocks would go up forever. They turned a deaf ear to any sane advice. Now, this greed is replaced by fear. There is so much of fear that the investors have become loss averse. They want to get out of stocks. Why a sudden change in sentiment? First , it is due to margin trading. Investors had become so greedy that they bought beyond their capacity through the futures and options. The brokers encouraged this and now when the client cannot pay the margin calls and they are liquidating the positions at a substantial loss. Second , investors borrowed from banks against shares. Now, since the value of shares is going down, banks are selling stocks in the market to reduce their losses. Third , investors are stuck with declining or non-saleable stocks. To nurse their losses, they need to liquidate. Most of the stocks being unsaleable due to price circuits, investors are fo...