What is Margin Trading and How Does It Work?

Margin trading is the practice of using borrowed funds from a broker to buy financial assets, such as stocks, that you could not afford with just your own capital. The amount that you deposit with the broker, called the margin, serves as collateral for the loan. Here, we will explore more about what margin trading is and how it works.

How Does Margin Trading Work?

Margin trading works when an investor borrows money from a broker to purchase securities. This borrowed money, combined with the investor's own funds, forms the total capital available for trading. The borrowed funds act as a loan from the broker, and the securities purchased serve as collateral for this loan.

The process involves opening a margin account with a broker, which requires an initial deposit known as the initial margin. The broker then lends the investor a certain amount of money, allowing them to buy more securities than they could with their own funds.

The investor must maintain a minimum account balance, known as the maintenance margin, to keep the margin account active. If the account value falls below the maintenance margin, the broker will issue a margin call, which demands that the investor deposit additional funds or sell some of the assets to cover the shortfall.

Example of Margin Trading

Assume that you have INR 80,000 and your broker allows you 5x leverage:
You can buy shares worth INR 3,80,000, where INR 80,000 is your own money and INR 3,00,000 is borrowed.

If the stock price increases by 10%, you would earn a profit of INR 38,000 — a 50% return on your capital.
But if the stock price falls by 10%, you would lose INR 38,000 — a 50% loss on your capital.

Conclusion

In conclusion, margin trading can be a profitable strategy if used wisely. However, it carries substantial risk, so beginners should avoid high leverage and only trade on margin after fully understanding all the risks and costs involved. We hope this blog on “What Is Margin Trading and How Does It Work?” has been helpful to you.

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Saniya

I am a writer, and this sentence speaks louder than anything, I love to play with words because I have a passion for writing easy and good-quality content that reflects simplicity. Readers like content that is straightforward with simple language. My priority has always been to deliver content that connects with the reader.

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