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Margin Trading

Definition of Margin Trading

Margin trading is a strategy that involves borrowing funds from a broker to take bigger positions in stocks, commodities, currencies, futures, or options.

Related Terms

Ex-Dividend Date

The ex-dividend date is the trading day on and after which a new buyer of the stock is not entitled to any dividends. Most traders say that a stock has gone ex-dividend when this happens.

Traditionally, the ex-dividend date is set a day before the record date when a company evaluates its records for existing shareholders. If a trader buys a stock that has gone ex-dividend from a seller, the one who'll get dividends is the seller.

Foreign Portfolio Investment

A Foreign Portfolio Investment includes stocks, bonds, ETFs, derivatives, and other financial instruments from another country. Generally, FPIs do not give an investor the right to ownership or a controlling stake in any organization. Instead, FPIs act as a passive income vehicle. That’s why FPIs are different to Foreign Direct Investment (FDI) in which an ownership stake is acquired with the intention of controlling and influencing business decisions.

Consumer Price Index

The Consumer Price Index (CPI) measures how costly goods and services have become over time. It is calculated by measuring the weighted average of the percentage change in the price of a basket of goods and services.

If the CPI increases, it means that inflation is on the rise. In India, the CPI replaced Whosale Price Index (WPI) as the primary measure of inflation in 2013.

Commodity

A commodity refers to physical goods and raw materials like aluminium, cotton, copper, sugar, steel, zinc, and others. Commodities are an essential part of the day-to-day life of individuals, companies, and industries.

But they can’t be traded like stocks in India. Instead, a commodity trader will enter into either of these three contracts to secure commodities or benefit from its price fluctuations:

  • Futures contracts
  • Options contracts
  • Cash contracts

These derivative contracts are traded on commodity exchanges in India like:

  • Indian Commodity Exchange (ICEX)
  • Multi Commodity Exchange of India (MCX)
  • National Commodity & Derivatives Exchange Limited (NCDEX)
  • National Multi Commodity Exchange of India (NMCX)

Commodity Futures

A commodity futures is a contract between two parties to buy or sell an underlying commodity like gold, silver, corn, and others are a pre-determined price and date.

A commodity futures contract is an obligation that’s entered into not just by retail traders but also companies who want to lock in a favorable price. This is the place to understand all about futures contracts in trading.

Equity Options

An equity option gives the holder the right but not the obligation to buy or sell the underyling shares at a pre-agreed price and date. Equity options are derivative contracts that derive value from underlying shares.

Every equity option comes with a lot size that specifies the total number of underlying shares the contract contains. A trade who wants to start options trading can procure the derivative contract by paying a premium.



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