Leverage and margin trading are the two popular trading strategies used by traders to enhance their returns. These approaches make it possible to take larger positions than what one’s own funds would normally allow. However, it is necessary to understand the risk and difference between margin trading and leverage trading to use them effectively.
In this blog, we will explain to you the key differences between leverage and margin trading.
What is Margin Trading?
Margin trading allows you to buy assets by borrowing funds from your stockbroker, enabling you to take larger positions than your available capital would otherwise permit. This can be done in two main ways:
- Pledged Margin – By pledging the shares you already hold in your demat account, you can unlock their value and use it as collateral to trade in your chosen assets. The pledged margin is always less than the current market value of the pledged securities.
- Margin Trading Facility (MTF) – Brokers also provide a facility where you can borrow additional funds directly to purchase stocks, often beyond the value of your holdings.
Check Out – Stocks Available for MTF
In exchange for providing MTF, brokers charge interest, which can range from 5.99% to 18% annually, depending on the broker. For instance, Pocketful offers one of the lowest interest rates in the market at just 5.99%. Interest accrues until the borrowed amount is fully repaid. Additionally, pledging charges may also apply when you use your existing shares as collateral.
Read Also: What is Stock Margin?
Features of Margin Trading
The key features of margin trading are as follows:
- Initial Margin: A trader is required to deposit an initial margin before executing a trade using MTF. When using pledged margin, no additional cash margin is required upfront, as the pledged shares serve as collateral.
- Margin Call: In MTF, the broker issues a margin call, requesting additional funds, if the funds in the trading account drops below the minimum maintenance margin due to market movements against your trading position. In pledged margin, if your losses exceed the pledged margin, the broker can sell your holding to cover your losses.
- Selected Securities: Not all stocks are eligible for margin trading. The list of securities that are allowed for margin trading is usually provided by brokers.
What is Leverage Trading?
Leverage is a feature that allows you to enter large positions by depositing a small amount of the entire trade value as a margin, and the remaining amount is paid by your broker. Generally, leverage is expressed in terms of multiples such as 5x or 10x. Leverage offered by a company depends on various factors, such as the market segment in which you are trading, such as cash, and derivatives segments.
Features of Leverage Trading
The key features of leverage trading are as follows:
- Increased Market Exposure: Leverage trading increases both profits and losses by allowing traders to create large trading positions with small capital.
- Multiple Segments: Leverage trading provides flexibility across various market segments, such as stocks, forex, commodities, derivatives, etc.
- Short-term Trades: Leverage trading is typically used by traders to earn profit from short-term price movements, generally intraday.
Read Also: Top 10 Highest Leverage Brokers in India
Key Differences Between Margin Trading and Leverage Trading
| Particular | Margin Trading | Leverage Trading |
|---|---|---|
| Source of Funds | Involves borrowing funds from the broker either by: • Pledging Margin – Using existing shares in your demat account as collateral. • Margin Trading Facility (MTF) – Borrowing additional funds from the broker to buy stocks. | Brokers provide extra capital (leverage) to take larger positions without requiring pledging of securities. |
| Ownership of Assets | You purchase and hold the shares in your account using the borrowed funds. | You typically do not own the underlying asset as leverage is usually available on derivative instruments or on an intraday basis. |
| Interest Charges | Brokers charge interest on the borrowed amount using MTF (usually between 5.99% – 18% annually). Pledging charges may also apply to avail pledged margin. | Leverage trading attracts no interest. |
| Collateral Requirement | Requires collateral ,i.e. your pledged shares for availing pledged margin. In MTF, shares purchased are pledged after purchase. | Usually does not require pledging; only margin deposit is needed as security. |
| Risk Level | Lower relative to high-leverage trading since it is backed by pledged securities and regulated borrowing limits. | Higher risk due to the ability to open much larger positions than your actual capital. |
| Purpose | Primarily used for long-term share purchases with additional funds. | Often used for short-term speculative trades in derivatives, forex, or commodities. |
Benefits of Leverage and Margin Trading
The key benefits of leverage and margin trading are as follows:
- Increased Purchasing Power: With leverage and margin trading, traders are able to execute larger positions than they could with their funds. This increases their capacity to take advantage of market opportunities without having to pay the entire amount upfront.
- Higher Profits: Even slight price changes may provide significantly higher returns than unleveraged positions.
- Opportunities in Any Market Direction – Whether the market is rising or falling, traders can capitalize on both bullish and bearish trends using various setups such as futures contracts, options, or margin-based short-selling.
Read Also: Top Tips for Successful Margin Trading in India
Risk Involved in Leverage and Margin Trading
The various risks involved in leverage and margin trading are as follows:
- Increased Loss: Losses can also increase exponentially if there is an unfavourable price movement in the stock price.
- Margin Call: The broker may issue a margin call if a trader’s account value drops below the necessary margin limit. To meet the margin requirement, the trader must either liquidate their current positions or make additional deposits.
- Auto Square Off: If the price falls below a certain level and the trader fails to deposit the additional margin required, then the broker can square off the position.
Conclusion
Both leverage and margin trading can significantly boost profits but also increase risk exposure. While margin trading involves borrowing against existing assets or availing a margin facility (MTF) for long-term share purchases, leverage trading is typically used for short-term speculative positions. Understanding these differences and applying sound risk management strategies — such as using stop-loss orders and avoiding over-leveraging — is crucial. Always consult with a financial advisor before using these trading approaches.
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Frequently Asked Questions (FAQs)
Is there any difference between margin trading and leverage trading?
Yes, both margin and leverage trading differ from each other as margin trading is a trading approach in which a trader borrows money from the broker by pledging their shares or takes a loan from the broker and pays interest against it. While in leverage trading, a trader deposits a small amount and borrows the remaining funds to increase their position over and above the capital deposited by them, usually to trade on an intraday basis.
Do I need to have a special account for margin trading?
No, you do not need a separate account to trade using margin trading facility (MTF).
What is a margin call?
A margin call is when your broker requests that you sell some of your shares or make additional deposits into your margin account in order to comply with the necessary maintenance margin level. This occurs when your leveraged position’s value significantly falls.
Is there any difference between MTF and Margin Trading Facility?
MTF is simply the acronym for Margin Trading Facility.
How to manage the risk involved in leverage and margin trading?
To manage risk, one must use stop-loss, avoid over-leveraging, and monitor their positions closely.
