You must have come across the word OPM and might have wondered what is OPM in share market? There are various definitions of OPM but in terms of share market and finance, OPM stands for “Other People’s Money”. So if anyone is talking about what is OPM in finance or what is OPM in stock market, it generally stands for Other People’s Money. This concept plays a crucial role in the stock market especially if you are involved in intraday trading. Through this concept, investors can borrow funds to maximise their return potential. In this article, we will explore the significance of what is OPM in share market, the benefits and risks of it and how investors and traders can use it.
What is OPM in Share Market (Other People’s Money)?
Other People’s Money (OPM) refers to the practice in which you use the money of other people that is money borrowed from other people to invest rather than using your own money. You must have heard about 5x trading margin when trading in intraday. Ever wondered why only 1/5 of the amount you traded with is being used? It is because the other amount has been borrowed from your broker to invest. It is the borrowed capital. In stock market or the share market, this concept involves financial institutions, brokers, or the use of margin accounts also known as Margin Trading Fund (MTF) to purchase stocks or other securities. The primary goal of this concept is to amplify the returns on the investment by using additional capital.
5 Powerful Benefits of Using OPM in the Stock Market
- Increased Investment Power: By using OPM, investors can significantly increase their buying power. Investors can take larger positions (upto 5x of their capital) in the market and potentially earn high returns but keep in mind, this will also increase your loss power by the same amount. Therefore, it is important to invest wisely.
- Diversification: With up to 5x more capital, investors can choose to diversify their portfolio more effectively by spreading the risk among various assets rather than just 1 asset so that the poor performance of 1 asset doesn’t reduce the return potential of the whole portfolio.
- Enhanced Returns: As you can use up to 5x the capital you have, the use of 5x margin can lead to amplified returns as the gains are earned on a larger amount of the invested capital.
- Professional Management: Many investors have access to professional advisors when using a huge capital. This can lead to a professional management of their funds.
- Opportunity Seizing: With an additional capital, investors can easily take the opportunity of various conditions in the market and take advantage of short-term market fluctuations and trends.
Strategies for Using OPM Effectively
- Risk Management: Implementing robust risk management strategies is crucial when using OPM. Not implementing risk management strategies can lead to a huge loss of capital. This includes implementing stop loss orders, diversifying securities, and measuring how much risk you can take.
- Research and Analysis: Great research and analysis can help reduce your risk. It is important to conduct thorough research and hire a professional investment advisor.
- Regular Monitoring: Continuously monitoring investments and market conditions is essential to ensure that your assets are not under any risk.
Conclusion
Other People’s Money is a powerful tool if used correctly and with proper risk management in the share market. Not implementing risk management could be a huge disadvantage of this tool as it may lead to a huge loss. The tools offers significant benefits but at the same time significant risks. It is important to use this tool under proper guidance from a professional investment advisor to mitigate potential downsides. For those looking to maximise their success in the stock market, OPM can be a game changer.
Filing taxes? Checkout our GST Calculator!
Need a stock broker which offers good OPM? Checkout Groww!