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.

Example:

Margin Trading Example

Index Definition

Meaning/ Definition:

An Index is a reference number, derived from the prices of a basket of constituents like commodities, currencies and stocks. The individual members are given weights depending on their relative importance. The final result is brought down to a base number of 100 and launched for use on a particular date, which becomes the birthday for that index. From that day onwards the index undergoes changes on account of changes in the prices of the individual constituents.

An index serves as a sample or quick indicator based on which users can draw a meaningful conclusion about the overall population.

Index – Example:

The most popular stock index in India, the ‘BSE Sensex’ comprises of 30 stocks that have the highest market capitalisation. Published since January 1, 1986, the Sensex is regarded as the pulse of the domestic stock markets in India. The base value of the Sensex is taken as 100 on April 1, 1979, and its base year as 1978-79.