You must be familiar with the terminology used in stock market investing. You should also have an in-depth understanding of market fundamentals. Stock market investments are a high-risk investment that is subject to market volatility. You must have heard the term buying power when you first start your stock market investment journey. What does stock buying power actually mean? Continue reading to learn more.
The total money an investor can spend to purchase stocks or securities is called buying power. It also includes the Margin Trading Facility (MTF) amount that can be used to invest in stocks. The buying power of your bank account and the MTF account is equal to the total amount that can be invested in stocks. It is important to note that you must have a margin trading account with the broking company in order to be eligible for the Margin Trading Facility. This account must be in addition to a Demat account or trading account.
A margin account will give you greater buying power once you have it. This is because your position can be leveraged in all securities except future options or contracts. If you don't have enough cash to buy stocks from X company, the margin trading account can be used to make the purchase. You can use the margin to open positions with cash or collateral from your securities and stocks. The maximum time a position can be held will be specified by brokers. The rule of thumb is N+T. Here N is the maximum number of trading days and T the time limit for the position to be carried over. N can vary from broker to broker and depends on variables such as the risk-taking benchmarks of the brokerage firm and the type and customer. Brokers will also stipulate the minimum amount that must be paid when opening a margin trading account. This minimum balance must be maintained at all times. Your position will automatically be squared off at the end of each trading session if you do not have the minimum balance.
The buying power of a non-margin or ordinary trading account refers to the amount of money in your bank account. If you have Rs 50 Lakh in your bank account, your buying power would be Rs 50 Lakh. It is important to remember that all purchase and sale orders for securities and stocks are made through your trading account and then reflected in the Demat account. Both accounts can be linked to your bank account. Your bank account will debit or credit your account for any purchase order or sale order.
Margin Trading Facility can help you increase your purchasing power. Investors who are looking to trade intraday via short-term options can benefit from this facility. This facility can be used to increase your purchasing power if you don't have sufficient funds for intraday trade. The MTF won't have any effect on your purchasing power if you have a long-term plan. Instead, you should concentrate on the best investments in stocks and securities while keeping in mind your risk tolerance and long-term financial goals.
Securities Exchange Board of India (SEBI), India's market regulator, has released a new set of rules for stock trading. They will be phased in from September 1, 2020 to Dec 1, 2020. The new rules stipulate that 20% of the transaction amount, which you have placed on a purchase order for, will be deducted from your bank account the same day. A trader who used the margin trading facility will be greatly affected by this change. Previously, there wasn't a limit on the leverage required for margin trading. However, all broking firms must collect 20% of transaction value before they can use the margin trading facility. SEBI also issued a new rule stating that intraday trading profits will be reflected into your account within two working days. The new rules will have a significant impact on investors' buying power.
Once you have a good idea of your buying power, it is time to make smart investment decisions. You should always borrow less money for a shorter period of time if you have used the MTF to increase your buying power. A reliable and trustworthy financial partner is essential. Look out for technology-enabled Demat and trading account, flexible brokerage fees, simplified trading platforms, expert market advisory, and simplified brokerage costs.