| Definition |
Buying or selling securities using borrowed funds from a broker. |
Buying or selling securities using only the investor’s own cash balance. |
| Capital Requirement |
Investor needs to put up only a fraction of the total trade value (margin). |
Full amount of the trade value must be available in the investor’s account. |
| Leverage |
Allows leveraging, magnifying both potential gains and losses. |
No leverage involved; transactions limited to available funds. |
| Risk |
Higher risk due to borrowed money; possibility of margin calls and forced liquidation. |
Lower risk as only own capital is at stake; no margin calls. |
| Interest Costs |
Borrowed funds incur interest charges, increasing overall cost. |
No interest charges as no borrowing involved. |
| Profit Potential |
Potential for higher profits due to leverage. |
Profit limited to the amount invested without leverage. |
| Loss Potential |
Losses can exceed the initial investment due to leverage. |
Losses limited to the invested amount. |
| Margin Call |
Broker can issue margin calls requiring additional funds if the account value falls below maintenance margin. |
No margin calls since no borrowing is involved. |
| Trading Restrictions |
May be subject to stricter regulatory and broker-imposed limits. |
Fewer restrictions as only own funds are used. |
| Suitability |
Suitable for experienced traders comfortable with higher risk and leverage. |
Suitable for conservative investors or beginners. |
| Settlement |
Can allow for quicker settlement cycles depending on margin terms. |
Settlement happens only after full payment is made. |
| Short Selling |
Margin accounts are required to sell short, as short selling involves borrowing shares. |
Short selling not possible with cash trading only. |
| Maintenance Margin |
Investors must maintain a minimum margin level to keep positions open. |
No maintenance margin requirement. |
| Broker Role |
Broker lends funds and monitors margin levels. |
Broker acts as intermediary for cash transactions only. |
| Account Type |
Requires a margin account with the brokerage. |
Cash account is sufficient. |
| Examples |
Buying ₹1,00,000 worth stock by putting ₹25,000 and borrowing ₹75,000 from broker. |
Buying ₹1,00,000 worth stock by paying full ₹1,00,000 upfront. |
| Psychological Impact |
Can encourage riskier behavior due to leverage. |
Promotes cautious investing as only own money is at risk. |
| Tax Implications |
Interest paid on borrowed funds may be deductible in some cases. |
No interest deductions; only capital gains tax applies. |
| Regulatory Requirements |
Subject to margin rules set by exchanges and regulators. |
Less regulatory oversight compared to margin trading. |
| Impact on Portfolio |
Can magnify returns but also increase portfolio volatility. |
Returns are proportional to invested capital; less volatility. |
| Summary |
Margin trading uses borrowed funds to increase exposure, carrying higher risk and reward. |
Cash trading uses only own funds, offering simpler, lower-risk investing. |
Margin Trading vs Cash Trading