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As a trader, one of the most important decisions you will make is how to fund your trades. Should you use your own money, or should you take advantage of margin trading? On one hand, stock trading with your own money gives you complete control over your trades. On the other hand, margin trading allows you to amplify your returns by borrowing money from your broker. Here we will discuss the characteristics of both and help you determine which is better.
Table of Contents
Differences Between Stock Trading and Margin Trading Facility
Let’s discuss the differences between both concepts to understand which can be a better fit for you.
1. Amount of Available Funds
One of the most significant differences between share trading and margin trading is the funds available for trading. With share trading, you can only trade with the funds that are available in your account. With margin trading, you can trade with funds that you have borrowed from your broker, which means that you can potentially trade with more money than you have in your account.
2. Returns
In margin trading, you can potentially generate higher returns because you can trade with more money than you have in your account due to the leverage effect. On the other hand, trading with your own money restricts the amount of capital that can be invested, thus limiting your profit potential. Dhan provides 4x leverage on margin trades along with a dedicated stock trading dashboard.
3. Risk Involved
Both instruments come with some degree of risk. In margin trading, you may be at risk of losing over your initial investment as you are using borrowed funds for trading. In trading with your own money, your risk exposure is limited to the funds you have put in a trade and cannot lose above and over your initial investment.
4. Need for Additional Funds
In share trading, you need additional funds only when you decide to expand your portfolio or increase the number of shares you already hold. On the other hand, margin trading may involve margin calls, which means your broker may require you to add funds to your account to meet the margin requirements or close out your position.
Which is Better?
Whether it is stock or margin trading, one is not better than the other. The choice between both ultimately depends on your trading strategy, risk tolerance and investment goals.
If you are comfortable trading with what you have and don’t want to worry about interest charges or margin calls, you can choose stock trading. If you want to increase your purchasing power and monetize your trading acumen, you can go for a margin trading facility.
Conclusion
Both stock trading and margin trading come with their own set of pros and cons. While trading with your own money enables you to trade with your available capital without borrowing, a margin trading facility increases your purchasing power and enables you to take larger positions. Dhan is a unique trading platform that offers both types of trading in a full-fledged interface.
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