The stock market may seem like a legal form of gambling. However, there is something more to it. If you know how to guess the future conditions of a company, you could invest in a better way and earn more profits. However, you should have some extensive knowledge of the market happenings and other processes. There are several ways of buying and selling in the stock market. Margin transaction is such a type that could be beneficial as well as disastrous for investors. Let us discuss it in brief.
If you do not have enough money to buy some stocks at the moment, you can still buy them with the help of a brokerage firm. They will initiate a margin transaction and will provide you with the additional amount you need to buy those stocks. You have to pay a minimum margin amount to the brokerage for safety purposes before you buy the stocks. Once you get these stocks, you can sell them at any time. However, during your sell order, you have to pay the money that you got from the brokerage firm without any deductions. Once you get a profit in your trade, you can make some money without investing a lot. However, when the chart goes down after you buy the stocks, you would have to pay the borrowed amount in full by putting some money extra from your pocket. It will incur more losses to you in addition to that happening on the market. So, margin transactions are always risky. You should go for it only if you are sure about the future valuation of the company you are buying. If you can manage to maintain the minimum margin throughout the session, you could get some gains.
Example for Margin transactions
To understand the concept of 美股孖展, let us assume that you are looking to buy an IPO with a margin transaction. Let the IPO cost be $200 per lot, and you wish to buy one lot. If you use the margin transactions, you can buy the IPO with only $100 that you have. In this case, the brokerage will offer you the remaining $100. So, the IPO will become yours if allotted. Now, you have to wait for the listing day and look at the fluctuations of the stock’s price. Let us assume that the share closes at $300 per lot. Now, the gross profit is $100. You can have this profit with yourself. But there is a necessity to pay the brokerage the amount you have borrowed to buy the IPO. So, you will give them $100 back. Now, you will have $120 in your account with a 20 percent profit on your investment. However, the repayment of $100 is constant regardless of your losses. If the listing day sees the price of the IPO fall to 20 percent, you will face a 20 percent loss, and you will be left with only $80 from your investment. It is how the margin transactions work.