What is the Meaning of Credit Balance in a Trading Account?

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The stock market has forever been an appealing space, however, it has witnessed an unprecedented influx in recent years. As a beginner in the market, it is important that you first understand the fundamentals of the market. You can begin online trading by exploring the trading account featuring your investments, returns, debts, and credit balance. In this blog, we will try to understand what the credit balance in your trading account is. 

Credit balance represents the amount available to invest after clearing your debts and adding sales. It plays a vital role in deciding your stand in the stock market. Stay with us to explore:

  • Credit Balance in a Trading Account

  • Uses of Credit Balance in a Trading Account 

  • Caution While Using Credit Balance 

Credit Balance in a Trading Account- An Overview

The credit balance of the trading account is the amount left for the account holder to invest or withdraw. This balance is calculated after subtracting debts that the account might owe for purchases and borrows and adding sales made through trading stocks.

To make it simpler, let’s take an example. You had ₹10,000 in your trading account. Thereafter, you purchase a stock worth ₹2,000 and sell a stock for ₹5,000. Now your available credit balance would be ₹13,000. 

Credit balance plays a significant role for traders interested in short-term sales. This balance creates a margin for the trader providing a playing field beyond the investment capacity. For instance, let’s say you have ₹10,000 as an investment fund and you want to purchase stocks/funds worth ₹13,000. The credit balance serves as a margin account allowing you to make the transaction even when you do not have ₹13,000 for investment. Later, you can sell the ₹13,000 stock/bond to make profits and return the additional money. This amount is king for traders as it influences the capacity to make further investments in the stock market. 

Uses of Credit Balance in a Trading Account 

Now that you have understood, what the credit balance in the trading account is, here’s how you can use the amount to your benefit-

  • Investments
    Credit balance allows you to make investments when the market is favourable. The amount can be used to purchase stocks, bonds and funds.

  • Margin stocks
    Margin trading depends largely on your credit balance. The available credit balance decides your capacity to cover margin stocks meaning borrow stocks surpassing your investment capacity. In simple words, this is just like a regular loan you get against your bank balance depending on income or credit score.

  • Strategic rebalancing
    Credit balance allows you to either diversify or make big investments depending on the market. The flexibility you enjoy makes credit balance important.  

Caution While Using Credit Balance 

While making investments using credit balance, you ought to be cautious and not let investment capacity overrule your decision-making. Here are a few tips to help you on the journey- 

  • Know your credit balance
    Make sure to keep track of the credit balance before investing in new funds or stocks.

  • Minimize risks
    A rather huge credit balance can impact decision-making negatively. Ensure that you are spending in the market according to market research and not just because you can do so.

  • Adhere to guidelines
    Regardless of your investing capacity, you have to follow trading rules and regulations.

  • Make prudent decisions
    Research the core before you take out funds from the credit balance. If needed, contact a specialist to make prudent decisions.

  • Margin trading
    While margin trading allows you to make investments against your capacity, you should be mindful that it is a loan that you will have to repay. Read the T&Cs of the margin agreement carefully.

The Bottom Line

Stock markets are notoriously volatile and yet they mark an inrush of beginners every year. As a budding investor, your first aim should be to understand aspects of trading that will play a crucial role throughout your investment journey. One such aspect is the credit balance, which can significantly influence your decision-making both positively and negatively. Therefore, traders must possess prudent decision-making abilities to make the best out of their credit balance. 

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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