Home/Blogs/Difference Between Margin Trading and Leverage: Everything You Need to Know

Difference Between Margin Trading and Leverage: Everything You Need to Know

derivatives tradingfuture and optionsfutures and options trading
Published Date: 18 Oct 2023Updated Date: 09 Jan 20256 mins readBy MOFSL
difference between margin trading and Leverage

Traders usually seek lucrative opportunities in the stock market to maximize their returns through various tools and strategies. Margin trading and leverage are two commonly used concepts in this aspect. While both involve borrowing funds to enhance trading potential, they differ. This article explores what margin trading and leverage are, highlights their key distinctions, and provides insights on getting started.

What is margin trading?

Margin trading allows investors to borrow funds from a broker to purchase stocks and bonds. The borrowed capital is a margin that acts as collateral for the borrowed amount. Margin trading helps traders control more significant positions than they would with their money. However, it also involves considerable risk.

Open Your free Demat Account in just 5 minutes!

Traders who engage in margin trading must maintain a minimum equity in their account, known as the maintenance margin. If the value of the investments falls below this threshold, the broker issues a margin call. Traders must deposit additional funds to cover the shortfall. If they do not, it can result in the broker liquidating the trader's position to recover the borrowed funds.

What is leverage?

Leverage is a financial concept that describes the ability to control a more prominent position with a minor capital amount. Leverage is not exclusive to margin trading; it can also apply to real estate and business financing. In the trading context, leverage is often expressed as a ratio, like 2:1, 5:1, or 10:1. It represents the multiple by which a trader can amplify their exposure to an asset.

Differences between margin trading and leverage

Here are some critical differences between margin trading and leverage.

  • Purpose

The primary purpose of margin trading is to allow traders to borrow funds to invest in assets, expanding their investment capacity. Leverage is a broader concept involving using borrowed capital to amplify potential returns across financial activities.

  • Risk management

In margin trading, traders must maintain a minimum margin requirement. Margin calls help mitigate excessive risk. Leverage helps in various financial activities, and risk management practices vary significantly.

  • Applicability
  • Margin trading is familiar with securities trading, like stocks and bonds. Leverage can be applicable in diverse financial scenarios, including real estate investments and derivatives trading.

Getting started with margin trading and leverage

Margin trading and leverage are handy tools that can amplify profits and losses in the financial markets. While they share the common thread of borrowing capital to enhance trading potential, they differ in purpose and risk management. These strategies can be valuable additions to a trader's toolkit if used wisely and cautiously. However, they need a cautious approach with a thorough understanding of intricacies and risks.

 

Related Articles:  Everything You Should Know About a Morning Star Pattern | Exploring Government Securities in India

 

Popular Stocks:  HDFC Bank share price | ICICI Bank Share Price | UPL Share Price | Tata Consumer Share Price | Divislab Share Price

You may also like…

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C