Margin trading facilities, also known as leverage trading, is an investment technique that allows investors to borrow funds from a broker. This allows investors to buy or sell financial instruments such as stocks, bonds, or currencies. Margin trading increases the potential return on investment, but exposes investors to higher risks. In this article, we will discuss how to enhance your returns with online trading, as well as the benefits, and risks associated with the technique, and the measures to mitigate risks while margin trading.

What is Margin Trading Facility?

Margin trading or leverage trading is a technique that allows investors to control large amounts of financial instruments with a small investment. In other words, investors borrow funds from a broker to buy or sell financial instruments. The borrowed funds act as collateral, and investors pay an interest rate on the borrowed funds.

Types of Margin Trading Facility.Types of Margin Trading Facility

1. Initial margin: The minimum amount of cash or securities that must be deposited by investors to open a margin account. Typically, the initial margin is a percentage of the total value of the financial instrument.

2. Maintenance margin: The minimum amount of cash or securities that must be maintained in the margin account to keep it active. If the value of the financial instrument falls, investors may receive a margin call, which requires them to deposit more funds to maintain the maintenance margin.

Benefits of Margin Trading Facility.

Margin trading increases the potential return on investment by allowing investors to control large amounts of financial instruments with a small amount of investment. For example, if an investor has $10,000 in cash and wants to buy stocks worth $20,000, the investor can use margin trading to borrow $10,000 from a broker and invest $20,000 in stocks. If the value of the stocks increases by 10%, the investor will earn $2,000 instead of $1,000 if he had invested only his cash.

Increased profit margins with Margin Trading.

Margin trading also allows investors to increase their profit margins by trading financial instruments with a small amount of investment. For example, if an investor buys stocks worth $10,000 with $2,000 of his cash and $8,000 of borrowed funds, and the value of the stocks increases by 5%, the investor will earn $500 instead of $250 if he had invested only his cash.

Risks associated with Margin Trading Facility.

Margin trading exposes investors to higher risks than regular investing. Here are some of the risks associated with margin trading:

1. Margin call: If the value of the financial instrument falls below the maintenance margin, investors may receive a margin call, which requires them to deposit more funds to maintain the maintenance margin. If investors cannot meet the margin call, the broker may sell the financial instrument to recover the borrowed funds.

2. Interest rate risk: Investors pay an interest rate on the borrowed funds, which increases the cost of investment. If the interest rate increases, the cost of investment also increases, reducing the potential return on investment.

3. Market risk: The value of financial instruments can be volatile and may fluctuate rapidly. Margin trading exposes investors to the risk of losing their investment if the value of the financial instrument falls rapidly.

Measures to mitigate risks while Margin Trading.

Here are some measures investors can take to mitigate risks while margin trading:

1. Set stop-loss orders: Stop-loss orders are orders placed with a broker to sell financial instruments if their value falls below a specific price. Stop-loss orders can limit the potential loss from market fluctuations.

2. Diversify investments: Diversifying investments across different financial instruments and sectors can reduce the impact of market fluctuations on the overall portfolio.

3. Manage risk exposure: Investors should monitor their exposure to financial instruments and reduce their exposure to high-risk instruments.

Conclusion.

Margin trading facility is a technique that allows investors to borrow funds to buy or sell financial instruments. Margin trading increases the potential return on investment, but it also exposes investors to higher risks. Investors can mitigate risks by setting stop-loss orders, diversifying investments, and managing their risk exposure. Investors should understand the risks and benefits of margin trading before using the technique.