Difference Between Margin Trading and Leverage

Introduction

Margin trading and leverage are often mistaken for the same concept. However, they share a key distinction.
Traders utilize margin to deal with leverage and increase their buying power. Whereas leverage enables them to trade for larger positions than the cash they have.
Thus, the higher the margin requirement, the lower the leverage ratio will be.

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Margin trading involves mortgaging assets to secure a loan from a broker. This enables individuals to engage in trading activities.
The margin represents the difference between an individual's total securities value within their margin account and the loan amount provided by the broker for trading purposes.
It starts with an initial investment known as 'minimum margin' and maintains collateral during trading that is called 'initial' and 'maintenance' margins.
Falling below the maintenance margin triggers brokers to enforce margin calls like prompting a deposit, loan repayment, or investment liquidation.
Margin trading is a complex interplay between assets, loans, and collateral.
It requires careful consideration of financial positions to avoid margin calls.

Leverage refers to utilizing borrowed capital to enhance potential returns. Investors and companies adopt this technique for different goals.
Investors leverage trades for higher returns via options, futures, or margin accounts.
Companies use leverage to finance assets through debt, bolster equity values, and avoid issuing new stock.
Leverage signifies the invested-to-borrowed money ratio. For instance, a 1:100 leverage allows trading of Rs. 100,000 for every Rs. 1,000 invested.
However, leverage heightens potential losses by risking a larger portion of borrowed funds compared to personal investment if a trade goes awry.

Both margin trading and leverage aim to bolster purchasing potential via borrowing.
While leverage encompasses various methods, including margin funding, margin funding operates like an overdraft account, incurring interest solely on used funds.
Margin trading designates the margin account debit as a loan, yet it lacks the rigid commitment of conventional leverage.
Equity investment amplifies potential returns, especially in unique scenarios. Such opportunities may necessitate an increased capital commitment.
To seize these prospects without capital constraints, investors can borrow from brokers or entities, leveraging their margins and sharing collateral.
Brokers seek assurance of repayment, ensuring interest coverage in adverse trade outcomes. This interplay underscores the nuanced relationship between margin, leverage, and investment optimization.
Trading stocks and ETFs with margin offers leverage, but it can also be achieved through other means, like leveraged ETFs in cash brokerage accounts.
Futures and forex trading provide substantial leverage ratios but also intensify the risks.
Newcomers should grasp margin trading fundamentals and start with stocks and options accounts before delving into the riskier domain of futures and forex trading.