Margin trading is a feature available on the stock market with the help of stockbrokers. The basic aim of the facility is to help investors purchase stocks worth more than what they can afford.
With the margin trading provision at play, investors can earn high returns by buying high-value stocks at a fraction of the actual price.
The remainder of the stock value is loaned by the stockbroker to the investor, with a nominal MTF interest rate attached. This amount is loaned when the investor leverages their market position either through cash or their investments or securities.
With all this in mind and as helpful as it may sound, using margin in share market investments does come with its set of risks and rewards. That is exactly what we will be telling you about here.
Advantages
Below is a list of some of the advantages or pros of using margin in share market investments:
- Higher Buying Power:
- With the help of Margin trading, investors gain access to more capital to invest than they have with them
- With the availability of higher capital, investors can then also invest in higher-value stocks
- Since the investment range increases, so does the potential to maximise their profit
- Leveraged Profits:
- When investors use leverage, they stand a chance to multiply their gains
- This can happen when the market moves in their favour.
- As a result, the profit potential for investors is quite high, especially if the market is volatile.
- Short-Selling Opportunities:
- Margin trading lets investors trade through short-selling
- In short-selling investors can profit from falling stock prices
- Access to High-Value Stocks:
- Because of the access to greater capital, investors now have access to stocks they might not have been able to afford before
- With such high-value stocks available, investors have better exposure to prominent companies and market leaders.
Disadvantages of Margin Trading
Below is a list of some of the disadvantages or cons of using margin in share market investments:
More Risky:
- Where there is the potential for higher profits, the potential for greater losses also exists
- This happens when the market moves against your positions.
- Sometimes, the losses could also potentially be greater than the initial investment.
Interest Payments:
- Since a majority of the total funds are being loaned to the investor by the stockbroker, the latter charges a nominal MTF interest rate on it.
If the MTF interest rate is high, it can end up eating into the profits or returns the investor gains from the investment
Margin Calls:
- A margin call can be thought of as a reminder to an investor by the stockbroker
- Margin calls help manage risks by pointing out to the investor that the value of the MTF account has fallen below a certain level.
- With this indication, the investor is expected to add more funds to the account to maintain the margin amount
- If this call is not heeded, the stockbroker may choose to forcefully liquidate some of the positions to prevent further losses
In Conclusion
Trading in margin meaning in share market can be quite exciting without a doubt, especially since it opens up new avenues for the trader. With a larger capital at their disposal, traders have the benefit of investing in high-value stocks, attaining a higher market position and potentially generating higher gains as well.
But like any other investment strategy, margin trading also comes with its fair share of risks and rewards. This is why investors must look at each aspect of the strategy before they decide to pursue it further. This will help them steer clear of potentially higher losses, which sometimes might also exceed the initial investment amount.
