Everything to know about margin transactions
If you wish to invest in the stock market, you would have to open an account with a 證券公司. The processes have become simple with the arrival of the internet and web applications. All brokerages are operating online and in the form of applications. However, if you want to be successful in the stock market, you have to learn a lot. Once you start you learning, you will get to know some terms. IPO is such a term that defines the process of buying a company’s shares initially when it comes to the market for the first time. However, sometimes, you would not have the required funds to buy these shares. At these times, you could use the option of margin transactions in the stock market. Using this option, you could buy the IPO without having enough funds with the help of the brokerage. In this article, let us discuss this process in brief with an illustration.
Margin transactions, an illustration
If you look to grab the concept better, you can look at the following example. Let us assume that an IPO of a popular FMCG company is about to arrive in the market. Let its issue size be ten shares per lot. If you wish to grab a bunch of shares from this company, you could not buy 15 or 26 shares as you want. There will be a restriction to buy shares in lots of 10. Either you could buy ten shares, or you could buy it in multiples of 10. So, you decide to buy 20 shares. However, the price of the company per lot is $300. So, there is a requirement of $600 to execute the order. Let us assume that you have only $300 in your pocket. If you still wish to go for two lots, you can rise a margin transaction with your brokerage. If you do so, you will get to buy these two lots with the money that the brokerage lends you. All you have to do is to wait and see the fluctuations of the company’s price in the market. Once it goes to a decent point where you witness profit, you can sell them off. Let us assume that you sell the stocks when the total price of the two stocks is $1000. Now, you are in the profit zone of $400. As you have borrowed some money from the brokerage, you would have to pay $300 back to them. However, you will get $700 in the end. Now, you have invested only $300 and got $400 back. It is the advantage of the margin transactions. However, if the price goes lower and lower, you would have to sell it with losses. But the repayment of $300 would not reduce. So, you will lose the margin amount of $300 that you have deposited with the brokerage irrespective of your loss in the market. So, you have to be careful with margin transactions.