describe the advantages and the disadvantages (i.e. risks) of using margin trading in stock investment.

Expert Solution

Advantages of Margin Trading :

- Investor can get high leverage against small deposit. This will allow investor to buy more security than they can afford and thus can earn huge returns

- Traders can take opprtunities as and when it arises without worrying about cash at that time

- Marging trading can be used across different segment. Intra day trading is normally done on margin.

Disadvantages of Margin Trading

- Since it allows to build larger position as compared to position that can be created by cash , a small move in opposite direction of trade can wipe off whole capital of the trader

- To maintain position in futures , trader has to maintain minimum margin, if such margin is broken the trader has to arrange cash otherwise position will be squared off by the broker

- Many time leverage comes with high interest rate and other hidden charges

jeff jeffy answered 2 years ago

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