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RISK IN MARGIN TRADING

Discuss RISK IN MARGIN TRADING within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; EXAMPLE : SUPPOSE THAT IN THE PREVIOUS EG, INSTEAD OF ROCKETING UP BY 25%, THE SHARES FALL BY 25%. NOW, ...

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RISK IN MARGIN TRADING
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Abhijeet S
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RISK IN MARGIN TRADING - September 13th, 2010

EXAMPLE : SUPPOSE THAT IN THE PREVIOUS EG, INSTEAD OF ROCKETING UP BY 25%, THE SHARES FALL BY 25%.


NOW, YOUR INVESTMENT IS WORTH RS. 15000 (200 SHARES* 75)
NOW, YOU PAY BACK YOUR BROKER RS. 10000, & END UP WITH RS. 5000.
IT RESULTS IN A LOSS OF RS. 5000
THAT’S A 50% LOSS, WHICH OTHERWISE( IN A CASH TRANSACTION) WOULD HAVE BEEN A LOSS OF ONLY 25%.


FURTHER, INTEREST HAS TO BE PAID ON THE SUMS BORROWED. HENCE, ONE COULD ACTUALLY STAND TO LOSE MORE MONEY THAN ORIGINALLY INVESTED.


IN A CASH ACCOUNT, THERE IS ALWAYS A CHANCE THAT THE STOCK WILL REBOUND, IF THE PERFORMANCE OF THE COMPANY IMPROVES & SO YOU MAY WANT TO HOLD ON FOR THE RECOVERY.


HOWEVER, IN MARGIN TRADING, THERE IS NO SUCH CHOICE SINCE THE BROKER CAN EXERCISE THE MARGIN CALL ANYTIME.
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