Buying On Margin

Suppose you have Rs 1,00,000 with you in your Bank account. You can use this amount to buy 10 shares of Infosys Ltd. at Rs 10,000. In the normal course, you will pay for the shares on the settlement day to the exchange and receive 10 shares from the exchange which will get credited to your demat account. Alternatively you could use this money as margin and suppose the applicable margin rate is 25%. You can now buy upto 40 shares of Infosys Ltd. at Rs 10,000 value Rs 4,00,000, the margin for which at 25% i.e. Rs 1,00,000. Now as you do not have the money to take delivery of 40 shares of Infosys Ltd. you have to cover (square) your purchase transaction by placing a sell order by end of the settlement cycle. Now suppose the price of Infosys Ltd rises to Rs. 11000 before end of the settlement cycle. In this case your profit is Rs 40,000 which is much higher than on the 10 shares if you had bought with the intent to take delivery. The risk is that if the price falls during the settlement cycle, you will still be forced to cover (square) the transaction and the loss would be adjusted against your margin amount. Selling On Margin : You do not have shares in your demat account and you want to sell as you expect the prices of share to go down. You can sell the shares and give the margin to your broker at the applicable rate. As you do not have the shares to deliver you will have to cover (square) your sell transaction by placing a buy order before the end of the settlement cycle. Just like buying on margin, in case the price moves in your favor (falls) you will make profit. In case price goes up, you will make loss and it will be adjusted against the margin amount.