Financial Awareness Level
Difference Between Margin Trading and Leverage
Investors and traders often use margin and leverage to maximize their market exposure with limited capital. Although they are closely related, understanding the difference between margin and leverage is crucial for managing risks effectively.
What is Margin and Leverage?
Margin
- Margin refers to the borrowed money traders use to buy securities beyond their available capital.
- It is the initial deposit required to open a leveraged position.
- Brokers provide this facility, allowing traders to take larger positions than their account balance.
Leverage
- Leverage is the ratio of borrowed funds to the trader’s own capital.
- It amplifies both profits and losses, increasing risk.
- Expressed as a ratio (e.g., 5:1 leverage means a trader can control ₹5 with ₹1 of their own money).
Margin vs Leverage: Key Differences
| Feature | Margin Trading | Leverage Trading |
|---|---|---|
| Definition | Borrowing money to trade | Using margin to amplify position size |
| Function | Acts as a loan from the broker | Multiplies buying power |
| Expressed As | Fixed amount (₹) | Ratio (e.g., 10:1, 20:1) |
| Purpose | To trade with borrowed funds | To control a larger position |
| Risk Level | High due to interest on borrowed funds | Very high due to magnified losses |
Difference Between Margin and Leverage With Example
Example 1: Margin Trading
- You have ₹10,000 in your account.
- The broker offers 50% margin, allowing you to buy stocks worth ₹20,000.
- You borrow ₹10,000 and must repay it with interest.
Example 2: Leverage Trading
- With 10:1 leverage, your ₹10,000 capital lets you trade ₹1,00,000 worth of stocks.
- Your potential profit or loss is amplified 10 times.
- A 5% market move can double your capital or wipe it out.
Conclusion
Understanding margin vs leverage trading helps traders make informed decisions. While margin allows traders to borrow money, leverage increases exposure to price movements. Higher leverage can lead to greater profits but also increases risks significantly. Always use these tools cautiously and with a clear risk management strategy.
NSDL - Margin Requirements and Margin Trading
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What is a Mutual Fund? - Beginner's Guide to Investing
Association of Mutual Funds in India
Disclaimer:
The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
FAQ Section
Is leverage the same as margin?
No, margin is the borrowed amount, while leverage is the ratio that determines how much you can borrow.
Which is riskier: margin or leverage?
Leverage is riskier because it magnifies both gains and losses significantly.
Do all brokers offer margin and leverage?
Most brokers offer margin trading, but leverage ratios vary based on regulations and broker policies.
Can I use leverage without margin?
No, leverage requires margin to work, as it is based on borrowed funds.
What happens if I can't repay margin?
If losses exceed your margin balance, brokers may issue a margin call or liquidate your positions.
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