Margin Trading And Leverage
As the number of investors in India increases, there are various ways to profit. Making investments, research, and time are important to get higher returns. There’s another way to maximise your returns via investments in equity and Forex. One can borrow money to make investments and gain huge profits.There are two ways to increase their purchasing power or initial capital investment. One can either exercise leveraging or carry out margin trading. Leveraging helps you take upon debt to invest, whereas margin trading helps you borrow money based on the investments.
You may be wondering now about the difference between margin trading and leverage. So, before we understand the difference between margin trading and leverage, let’s learn what margin trading and leveraging are.
Table of Contents
What is Margin?
Margin trading gives an investor the necessary buying power to purchase a large position. An investor needs a margin account to carry out margin trading. Add a percentage of the trade amount to the account to enter a position known as the initial margin. A margin is a difference between the security value and the amount present in the margin account. The broker provides the margin to make that trade and buy the asset.
The maintenance margin is an investor’s margin needed to always maintain in his account. If the margin in your account changes due to the securities value reduction, investors are meant to keep adding the amount to ensure the maintenance margin amount is always available. If you fail to do so, to pay back the loan amount to carry out that trade, you will have to sell the investments, known as a margin call.
What is Leverage?
Leveraging is the practice where an individual or a company takes a loan to maximise future returns. Companies take up debt to grow their revenue in the long run. It helps in increasing production, research, development, etc. Instead of liquidating the company’s shares, corporations use this resort. Individual investors tend to use leverage via trading in futures and options or margin accounts.
Leverage Ratio
When investing or trading, investors have to carry out a certain number of trades, and based on that, they can leverage the rest of the amount. This amount is figured out through the leverage ratio. Say, for example, the leverage ratio is 1:100. It means that for every 1000 rupees you want to invest, you will have to shell out 10 rupees. It allows investors to make tremendous profits for small investments and has a major downfall. The loss you can incur is tremendously huge due to the high leverage ratio.
What is the Difference Between Margin Trading and Leverage
There are differences between margin trading and leverage. When it comes to trading in equity or Forex, leveraging provides you the purchasing power based on the debt you are allowed to undertake. Another difference between margin trading and leverage is that, in margin trading, the money you borrow from the brokers is dependent on the securities you buy, as it is held as collateral. Borrowed funds must be repaid in full, plus the interest.
Conclusion
This article on the difference between margin trading and leverage will make you understand trading vs. leverage. It is sure that margin and leverage are quite similar. Even though it is similar, you can point out the differences between margin trading and leveraging. Both provide you with excess purchasing power based on their methods. While comparing margin trading vs. leveraging, one must realise that they can come with their fair share of losses. With higher chances of profit, the risk factor is also quite high.
Frequently Asked Questions (FAQs)
The minimum margin varies based on your broker. Each broker lends you money to carry out trades based on various factors. Each broker has its minimum margin. The leverage ratio, too, can differ from broker to broker. It is advised to carry out research before going for one, and you must learn the difference between margin trading and leverage before choosing one.
To carry out margin trading, one needs to open a margin account. There are no special requirements for an account to take upon debt for leverage. Ensure to maintain the minimum margin in your margin account. For leveraging, ensure you know the leverage ratio and take upon debt accordingly. It’s advised to know the difference between margin trading and leverage before choosing either way of increasing investing power.
Leverage trades allow investors to increase returns through options, margin, or future accounts. On the other hand, companies can go for leverage trading to finance assets using debt financing to invest in significant operations and increase equity valuations.
Margin trading allows you to borrow money from a stockbroker to buy stocks. You can buy more stocks in margin trading with the minimum funds available in the account. Leverage trading can get you a larger exposure to an underlying asset in the market with the minimum amount in your account. It is possible to earn maximum returns in both margin and leverage trading. Choosing between them is thus a matter of personal preference.
Here are the following markets where you can perform leverage trading:
1. Cryptocurrencies
Cryptocurrencies are digital currencies. You can trade in cryptocurrencies as you do in forex trading. There is no involvement of banks and governments in cryptocurrency trading.
Through leveraged products, you can have maximum exposure with a minimum amount.
2. Indices
An index means a numerical representation of a group of assets related to how they perform. They can be from a particular area, region, sector, or exchange. You can trade them using products mirroring their price fluctuations.
3. Forex
Foreign exchange is commonly known as forex exchange. It allows you to buy and sell currencies to profit—the maximum number of trades in the world. There are comparatively small movements in forex trading, so many investors for leverage trading.
Leverage is an extremely powerful tool for trading through which you can get your maximum investment exposure to earn maximum returns. Here are certain benefits of the leverage system:
Maximum profits
When you trade-in leverage, there is a requirement for a fraction of the value. The calculation of profits depends upon your position’s full value. Therefore, you can amplify your returns as much as you can.
Attractive opportunities
The leveraging system makes it possible to free up capital dedicated to other investments. Therefore, gearing means the ability to maximize the investment amount.
Shorting the market
When you use leveraged products for speculation, you can also take advantage of the falling and rising markets, which is called shorting the market.
24-hour availability
Trading hours differ from one market to another. You can trade in certain markets like key indices, forex, cryptocurrency, etc., 24*7.
If there is a chance of earning a significant amount of profits in leverage, there is a proportionate risk. So, you must manage your risk by implementing stops and guaranteed stops to reduce leverage risk.