Difference Between Margin Trading And Short Selling | Espresso

Margin Trading vs Short Selling

While short selling and margin trading is quite similar, people often get confused while differentiating between the two. Nevertheless, there are major differences between the two.

Published on 24 April 2023

Firstly, you must understand that the debate of margin trading vs short selling is that both leverage existing resources for enhancing returns. However, the risks and returns are very likely to be different. Thus, it’s immensely crucial to understand this debate in extensive detail. Stay tuned to this article better to understand the differences between short selling and margin trading.

But before we dig deeper into the debate of margin trading vs short selling, let’s find what each of them means. Let’s get rolling.

Margin Trading - What is it?

Margin trading, popularly known as MTF, enables you to invest more than what you have in your trading account with the SEBI registered broker. Since you can activate a margin account with the broker, it is best known as margin financing or margin trading financing. Further, the broker enables you to purchase more than you can afford.

And if you have a net debit on your trading, you are likely to be charged with interest and not otherwise. Similarly, when you have a margin account with the broker, you are permitted to carry out margin trading. However, you can just pay a fraction of the shares’ cost and take over a bigger position on your trades.

On the other hand, you must ensure that your margin account is always replenished with basic maintenance magic money.

Short Selling - What is it?

Before we can determine the significant differences between margin trading and short selling, let’s look into how short selling works. Short selling is a typical method which enables you to sell your shares which don't belong to your Demat account. This can also be done by making the best use of the broker's margin trading facility.

Please remember that you can easily do this as soon as your MTF facility is activated. And while these shares don’t belong to your Demat account, you can easily share them in the margin account. Most importantly, you always have the opportunity of making a profit whenever the price goes down.

Margin Trading vs Short Selling - What are the Key Differences?

Even though margin trading and short selling have quite a few common things, there are major differences. In margin trading, you must borrow money from a broker to purchase securities. But in short selling, you can always borrow securities to sell them. However, in both cases, you are borrowing from the broker.

Nevertheless, there are still greater differences, and that’s what we’ll be discussing in margin trading vs short selling.

  • Both margin trading and short selling are distinct trading concepts with risk profiles and vastly different outcomes. It is mainly because the former facilitates purchase while the latter facilitates the short sale.
  • While borrowing funds from your broker to buy shares, you are likely to end up with a long position. And if the share price rises, you are likely to earn profits. Thus, your potential loss also becomes limited with a long position as the shares are capable of dropping to zero. While the funds are borrowed, you are capable of losing more money than the capital you commenced with.

But by borrowing shares to short-sell them, you might end up with a short position. However, you are likely to profit whenever the share price drops. And while you have a short position, your potential loss becomes unlimited. This is because you need to buy back the shares in order to close your short position. Most importantly. You must purchase the shares at the prevailing price.

  • Another significant point that comes up in margin trading vs short selling is that both have different investment results. Basically, in margin trading, you borrow money from a broker to purchase securities. Meanwhile, for short selling, you borrow securities in order to sell them.

Remember, when you go for short selling, your broker borrows the securities from their owner. Moreover, your broker just facilitates the transaction.

To Conclude

By now, you must be clear about the major differences between margin trading vs short selling. However, you must remember that both margin trading and short selling involve risk. That is the reason why only pro traders venture into the same. But even if you want to begin, then there’s no harm in that. You can always take one step at a time and adhere to these advanced methods.

Chandresh Khona

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