Loans
Cards
Insurance
Investment
Stock Market
Electronics Mall
CIBIL Score
Knowledge Centre
Calculators
Do not call
En
Understand the difference between margin trading and leverage to explore how each approach affects buying potential, risk exposure, and capital requirements.
Margin trading and leverage are two widely used concepts in stock market trading, especially among active traders and investors who aim to amplify returns. Although both involve borrowing capital to increase exposure, they operate differently and serve unique purposes. Understanding the distinction is important because both can magnify profits—but also significantly increase risk.
Margin trading is a facility that allows traders to borrow money from a broker to purchase more securities than their available capital permits. The trader must deposit a certain percentage of the total trade value, called margin, while the broker funds the rest.
Margin trading is commonly used in:
Intraday trading
Short-term directional bets
Volatile market opportunities
Leveraged investment strategies
Requires an initial margin deposit
Securities purchased act as collateral
Interest is charged on the borrowed amount
Trades may be squared off the same day or carried forward (depending on rules)
Subject to margin calls if market moves unfavourably
Margin trading follows a straightforward mechanism:
Trader places a buy order using the margin trading facility.
Broker contributes the remaining capital needed for the trade.
Securities are purchased and held as collateral.
Trader must maintain a minimum margin (SPAN + Exposure, depending on exchange).
If prices fall, the broker may issue a margin call.
If margin is not restored, the broker can square off the position.
Initial margin ranges from 10%–40% depending on volatility.
Interest rates for margin funding vary across brokers.
Brokers follow exchange-mandated risk and settlement rules.
This mechanism allows traders to take larger positions than their cash balance.
Suppose a trader wants to buy shares worth ₹1,00,000, but has only ₹20,000.
If the broker offers 5x margin, the trader can still purchase:
₹20,000 × 5 = ₹1,00,000 worth of shares
If the stock rises 5%:
Profit = ₹5,000
On investment of ₹20,000, return = 25%
If the stock falls 5%:
Loss = ₹5,000
On investment of ₹20,000, loss = 25%
This shows how margin amplifies both gains and losses.
Leverage refers to using borrowed capital or financial instruments to increase a trader’s exposure relative to their available capital. While margin is a type of leverage, leverage itself is a broader concept.
Leverage is expressed as a ratio, such as 2x, 5x, 10x, or even 100x (in forex and crypto).
Helps control a larger position with smaller capital
Used in derivatives like futures, options, and forex
Can magnify returns significantly
Involves high risk if market moves against the trader
Requires strict risk management practices
Unlike margin trading (which is mostly equity-based), leverage applies across multiple asset classes.
Leverage multiplies a trader’s exposure. For example:
With 10x leverage, ₹10,000 allows exposure of ₹1,00,000
With 20x leverage, ₹10,000 controls ₹2,00,000 worth of assets
Formula:
Exposure = Capital × Leverage
If the position moves:
+2%, trader earns 20% profit (at 10x leverage)
–2%, trader suffers 20% loss
Thus, leverage raises both the reward potential and the risk significantly.
A side-by-side comparison to clarify the difference:
| Parameter | Margin Trading | Leverage |
|---|---|---|
Definition |
Borrowing funds from a broker to buy more shares |
Using borrowed capital or derivatives to increase exposure |
Scope |
Mostly equity cash segment |
Used in equities, derivatives, forex, crypto |
Representation |
As margin percentage (e.g., 20% margin) |
As a ratio (e.g., 5x, 10x, 20x) |
Collateral Required |
Yes |
Depends on instrument |
Interest Charges |
Interest on borrowed amount |
Included in contract pricing/spread |
Risk Level |
High |
Very high |
Settlement Rules |
Exchange-specific |
Depends on leverage product |
Usage |
Short-term trading (intraday/carryforward) |
Futures, options, forex, contracts, margin products |
Exposure |
Limited to approved securities |
Much higher exposure possible |
Margin trading is a method, while leverage is a broader concept that margin itself falls under.
These benefits highlight how leverage can expand trading opportunities:
Allows traders to take larger positions than their cash balance permits.
Small market moves can generate substantial percentage returns.
Leverage allows traders to take positions in higher-priced stocks.
Free capital can be allocated to multiple trades simultaneously.
Leverage allows exposure across multiple sectors or instruments.
These risks commonly arise in margin trading:
Losses increase proportionally with leverage—sometimes wiping out entire capital.
If equity falls below the maintenance margin, traders must add funds immediately.
Interest on borrowed funds reduces net returns.
Brokers may square off positions without permission during adverse movements.
Leverage in volatile markets increases potential risk, particularly for inexperienced traders.
A margin calculator helps traders determine:
Required margin
Maximum buying potential
Leverage applicable
Interest cost (if applicable)
Quantity they can purchase
Example:
If margin requirement is 25%, and you have ₹40,000:
Buying potential= ₹40,000 ÷ 0.25 = ₹1,60,000
This determines the margin requirement and potential trade size.
Before analysing leverage risk, it’s essential to understand these core building blocks:
The minimum deposit required to open a leveraged position.
The minimum equity balance required to keep the position open.
A warning from the broker to add funds due to falling equity.
A risk-management tool to limit losses in leveraged trades.
The price at which the broker forcibly closes the position.
Total market value controlled using leverage.
These concepts ensure safe and informed trading.
Margin trading and leverage both allow traders to increase their market exposure beyond personal capital. While they can boost returns dramatically, they also raise the risk of rapid losses.
Key takeaways:
Margin trading = borrowing funds from a broker.
Leverage = broader concept of amplifying exposure through borrowing or financial instruments.
Both offer higher return potential but come with significant risk.
Risk management—stop-losses, hedging, and proper margin planning—is essential.
Effective use of leverage depends on understanding market dynamics and associated risks.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Margin trading is a facility that allows investors to purchase securities using borrowed funds from a broker, enabling positions larger than the cash available in the trading account.
Leverage refers to the use of borrowed capital or derivative instruments to increase market exposure relative to the amount of own capital invested. It magnifies both potential gains and potential losses.
Margin trading works by requiring the trader to deposit an initial margin, after which the broker finances the remaining amount. The position must maintain the prescribed equity level, otherwise the broker may issue a margin call.
Key risks include magnified losses, interest charges on borrowed funds, margin calls due to falling equity, and the possibility of forced liquidation if requirements are not met.
Leverage offers increased purchasing potential, the possibility of enhanced returns, and efficient capital utilisation when used prudently.
Margin trading is the mechanism through which funds are borrowed to initiate leveraged positions, while leverage represents the broader concept of increasing exposure through borrowing or derivative-based structures.
.jpeg)
79363
Unlock the world of credit! From picking the perfect card to savvy loan management, navigate wisely.
44915
Money Management and Financial Planning covers personal finance basics, setting goals, budgeting...
21435
Explore the investment cosmos! From beginner's guides to sharp-witted strategies, explore India's treasure trove of options.
34909
Navigate the tax maze with ease! Uncover Income Tax 101, demystify jargon with Terms for Beginners, and choose between Old or New Regimes.
9997
Discover essential insights on various types of insurance in India.
4419
Welcome to Tech in Finance, where we explore the exciting intersection of technology and finance...
Personal Loan, Business Loan, Collateral
Credit Score, Report & Analysis
Fixed Deposit, Mutual Fund, NPS, Demat A/C, SGB
General Insurance, Life Insurance, Term Insurance
Stocks, IPOs
Smart Phone, Speaker, EarPhone
Academy 
.jpeg "image not found")
