Tuesday, September 13, 2016

Margin Trading Definition

Meaning and Definition

Stock prices constantly fluctuate in the stock markets. A number of Speculators called day-traders try to make a living out profits from these minor price variations. Since the price differences within a day are small, profit from such variations is insignificant after adjusting brokerage and other transaction cost. Therefore the stockbrokers extend them a temporary loan, a few times the own investment (margin) of the trader, enabling the value of trade to be enhanced many times, thereby enhancing the profit into a meaningful sum.

Margin trading is a double-edged sword. As it has the potential to enhance a small profit many times, it equally magnifies a small loss many times more!

In fact the loss is not just restricted to the price difference but includes twice the broker's fees, both on sale and purchase.


Margin Trading Example

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