Margin Trading vs Cash Trading: Which is Better?

Investing in the stock market requires you to make smart choices and develop a mindset that can evaluate both sides of putting money in an asset. A question that often confuses an investor is what to choose between Margin Trading and Cash Trading.

One provides a chance to leverage the market situation beyond the capital outlay while the latter deals with trading within the capital limits of the investor. Both types of trading have their pros and cons and to make the best choice for yourself, you must first understand the fundamentals. 

What is Margin Trading

Margin Trading is a financial product that allows an investor to trade in stocks beyond their actual capital outlay. Under this type of trading, investors borrow funds from the broker at interest rates to invest in stocks that otherwise would have not been possible due to insufficient capital.

Using margin in share market, investors get to increase their purchasing power which enables them to freely trade in bigger stocks and diversify their investment portfolio. 

What is Cash Trading

Cash Trading, as the name suggests, is where traders trade with stocks using actual cash/money that they own. Under this type of trading, investors buy securities and assets with the money they have in their trading account and do not get into borrowings. 

Margin Trading Vs Cash Trading: What Should You Choose

Let’s first understand the differences between Margin Trading and Cash Trading:

1. Leveraging Capacity

Margin Trading provides a chance to leverage the market trends to its full potential by providing margin money whereas in Cash Trading investors do not get a chance at leverage and they invest within their fund limits. 

2. Risk Level

Since Margin Trading is done with borrowed funds that come with an additional interest rate, the risk levels are higher as the investor is under an obligation of repayment. In cash trading, the risks are limited only to the amount the investor has put in. 

3. Potential Returns

Investors usually opt for MTF to enter the market of bigger stocks and diversification that enhances the chances of profits and has better potential for higher ROI. Under cash trading, which has lesser chances of risks, returns are limited to the investment made. 

4. Account Requirements

MTF requires an investor to maintain a minimal margin balance in the trading account whereas under cash trading the investor is under no obligation to maintain a stipulated amount. Additionally, MTF has to be done through a margin account while cash trading simply requires a trading account. 

5. Examples

Under the Margin Trading Facility, let’s say you want to buy stocks worth ₹1,000 and you only have ₹200 in your trading account. You can borrow ₹800 from your broker using your margin account to purchase the stock worth ₹1,000. Remember that you are liable to repay the borrowed amount along with pre-decided interest rates.

Under cash trading, if you want to buy a security worth ₹5,000 you need to have ₹5,000 in your trading account for Cash Trading. 

Factors to Keep in Mind Before Choosing a Trading Method

Margin Trading Facility and Cash Trading have their pros and cons that make it difficult to choose a reliable method. Here are a few things that you should keep in mind to make a smart decision:

• Your investment goals.
• Your risk appetite i.e. the level of risk you can overcome. 
• The chances of diversification and potential profits.
• Finding the lowest MTF interest rate broker.

The Bottom Line 

Choosing between Margin Trading and Cash Trading is a subjective choice that calls you to evaluate your investment goals and risk appetite. As a beginner in the stock market, you might want to delve into cash trading and as you gain an understanding you can expand your purchasing capacity with Margin Trading Facility.

Remember that making choices in stock market trading simply requires an investor’s discretion and you can get better at it by reading market trends and staying updated with the news and events of stocks you are interested in.