4 Risks And Rewards Of Margin Funding: What Every Trader Must Know

Ever wondered how some traders multiply their gains in the financial markets, achieving results far beyond the reach of conventional trading? It is due to the financial tool, also known as “Margin Funding”. Margin funding helps traders use leverage and expand their horizons. It enables traders to borrow funds to magnify their market exposure, which unlocks the potential for higher profit for them.

If you also wish to use margin funding for online trading, this article will give you a fair understanding of the pros and cons that you should consider.

4 Rewards of Margin Funding

Here’s a quick sneak peek into the rewards of Margin Funding:

1. Increased Trading Capital

One of the primary rewards of margin funding is that it boosts the trader’s available capital. In traditional trading, you would only have a limited amount of cash, which you can invest, but in margin trading facility, you can leverage your investments by borrowing funds from your broker.

Doing this would multiply your buying capacity, which enables you to take a more significant portion of the market than your capital would allow.

2. Access to a Wider Range of Assets

You might have a narrow range of security options in the case of traditional trading methods. However, you get access to a vast range of assets in case of marginal trading to expand the horizons by having more funds to trade.

The broader asset selection in margin funding offers diversification advantages and enables you to capitalize on emerging trends in different sectors.

3. Hedging

Margin funding can be used for hedging purposes. Traders can use borrowed funds to hedge their existing positions in the market.

For example, if a trader holds a significant number of shares in a particular stock and wants to protect against a potential downturn in that stock’s price, he/she can short sell the same stock using margin or can also trade options for the same, effectively hedging their long position.

4. Short-Selling Capability

Margin accounts often provide the ability to short-sell securities, allowing traders to profit from declining markets.

Short-selling is a strategy where a trader borrows shares of a stock and sells them, aiming to buy them back at a lower price to return to the lender. This can be a way to profit from bearish market conditions.

4 Risks of Margin Funding

Here’s a quick sneak peek into the risks of Margin Funding:

1. Margin Calls

Margin Calls are a critical component of margin trading as they showcase a crucial risk that the traders must be aware of. A margin call generally occurs when the value of the trader’s account falls below a certain level specified by the broker. Margin calls pose a significant risk as these escalate rapidly, especially in volatile markets. Your broker and dissolve the pledge stocks for margin.

2. Interest Costs

Interest is a fundamental aspect of margin trading as it represents the price the traders pay for borrowing funds to amplify their market positions.

To mitigate the impact of interest costs, you should consider the interest rates that the broker charges.

3. Volatility and Market Risk

To manage the volatility and market risk associated with margin trading and a larger trading position, you must employ robust risk management strategies.

It involves setting stop-loss orders, diversifying the portfolio, and staying informed about market news, which could impact their positions.

4. Psychological and Emotional Stress

Although psychological and emotional stress is often underestimated, these are the crucial aspects of margin trading. When you utilize borrowed funds to amplify your positions, it not only enhances the potential for gains but also exposes you to emotional turbulence. Greed can be dangerous.

Thus, you must maintain a disciplined approach to manage this aspect.

Conclusion

Margin Trading is a crucial tool that magnifies both the gains and the losses. By knowing the risks and rewards of margin funding, you can make an informed decision, ultimately boosting your chances of success in the financial markets. If you wish to start online trading in share market, you can visit Dhan, the best platform for everything related to trading and investing.