Margin trading gives you a financial leeway to buy stocks even if you do not have funds to purchase it. In simple words, it is very similar to buying securities on credit.
The exchanges allow the investors to use this option to buy stocks in the futures market.
You can take a position on a company scrip by buying or selling shares on margin.
However, you need not borrow money to buy shares on margin. This is because you will take a position at the beginning of the settlement cycle and square it off (closing out the position) before the closing hours of the same trading day.
Margins are quoted as a certain % of the value of the transaction. Let us assume you want to buy 1000 shares of Company X at Rs 500, you will require Rs 5 lakh to make the purchase. If the margin is 30%, you can buy the 1000 shares of the company at Rs 1.5 lakh.
But you have to place the sell order on the stock by the end of the settlement cycle since you don’t have Rs 5 lakh to buy 1000 shares. Within the settlement cycle, if the scrip of Company X gains Rs 100 per share, you will make a profit of Rs 1 lakh. Similarly, if the price falls, the difference will be settled against your margin account.
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