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

Is it a Good Idea to Learn Intraday Trading or Margin Trading?

Dear Friend!

Thank you very much for raising this question. You are doing a great service not only to yourself but for many more aspirants like you. You are already well off not knowing intraday trading. Please do not learn and never indulge. It is dangerous enough if you are playing with your own money but if you are betting on borrowed money or Margin Trading, it is a sure path to catastrophe.

Friend, do not think I am standing on a tall alter and delivering sermons. I was once like you, and I say these words out of my own bitter experience as well as from the wise counsel of inveting luminaries like Benjamin Graham and Warren Buffett.

I had been a day-trader/ speculator myself, many years ago, with a goal of making Rs.2500 a day out of stock trading. I presumed, stupidly though, that being a charted accountant, I had the perfect credentials to hit gold on the stock market. Alas, besides many small daily losses one fateful day, in early 2000s, my entire savings, running into several lakhs of rupees, were wiped out, in less than a second, when the market crashed about 400 points. That day I vowed never ever to dabble in stocks.

For a long time I totally avoided stocks. One day my eyes fell on the book ‘The Intelligent Investor’ by Benjamin Graham, lying on the pavement. I refused to touch it, leave alone browsing it, lest I may be dragged back to the vice again. Some irresistible force pushed me into buying and reading it, which I reluctantly did. That book changed my life for ever.

Since then I am safe and cheerful value investor, happily following in the footsteps of Benjamin Graham and WarrenBuffett.

We all have the same goal of making money from the share market don’t we? When there is a sure and safe approach to make plenty of money through long-term investments in the share market through ‘Value Investing’, why travel the disastrous path of intraday trading, which will surely lead to imminent ruin?

Buy your copy of The Intelligent Investor right now! Commence the happy journey of truly rewarding value investing.

Thank you,

With Best Regards,

Anand