What is margin?
Margin in investment is the difference between the selling price of a product or service and its cost of production or acquisition. It reflects the degree to which a business or individual has successfully used its available capital to generate profits from a certain venture or investment.
How the margin is calculated?
Margin is usually expressed as a percentage of the selling price, and it is calculated by dividing the operating profit (gross revenue minus total costs) by the gross revenue and multiplying it by 100. Higher margins generally mean more efficient use of resources and greater profits for investors.
What is Margin Trading
Margin trading allows investors to purchase more securities than they could normally afford. It essentially lets them use borrowed money from a broker or another institution to buy and sell assets. This means that rather than having to provide the full capital for each stock purchase, only a fraction needs to be paid. The difference between the amount invested and the value of the asset becomes what's known as borrowed money or margin.
Pros and cons of Margin Trading
Margin trading can be an intriguing and potentially lucrative finance strategy, but it also carries inherent risks. With margin trading, a trader borrows money from a brokerage firm to purchase more stocks than they'd normally be able to buy with standard trading. The benefit of margin trading is that when successful, the investor has the potential to earn significantly more money than if they had only purchased their initial allotment of stocks. However, there are downsides as well - When market prices drop, an investor could face losses much greater than the amount of money they directly invested in their stock purchase.