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:
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| Margin Trading Example |
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