A lot of you may have, at some point of time, borrowed money from friends or family to invest in the stock market. This is exactly what margin trading is all about -- at the very basic level.

Your friends/family may not charge an interest for using their money nor do they take possession of your shares as a collateral for the money they have lent.

So what is margin trading as it is practised in the stock markets? It is borrowing money from a broker to purchase stock. In other words, it is a loan from the broker, which allows you, the investor, to buy more stock than you would be able to normally.

As an investor you need to open a margin account with your broker and a minimum margin needs to be maintained in that account.

This minimum amount depends on the rules and regulations so we will not get into the nitty gritties of it. We are interested in how to make money with this scheme. Trading websites in India such as ICICIDirect.com allow margin trading but with the investor's own money.

However, the investor has to use only a portion of his funds to trade in the stocks he or she fancies. So some stocks require the investor to put in around 25 per cent of the total value of the transaction or 33 per cent depending upon how risky the stock is. In some stocks it is as high as 50 per cent.

Another restriction is that the investor has to square up the position before the end of the day. Positions entered into on margin trading cannot be carried over on the web-sites unlike the ordinary market.

So now lets get down to business -- say you buy a scrip for Rs 50 and its price rises to Rs 75.

In the ordinary course of events, if you are not into margin trading, you would have paid for it in full and hence earned a 50 per cent return on your investment.

But if you bought the stock on margin, lets say paying Rs 25 in cash and borrowing the balance from your broker -- you would end getting 100 per cent returns on the money you invested though would have to yet pay interest on the money you borrowed from the broker.

The downside to using margin trading is that if the stock price falls then your losses can be substantial. Let's say the stock you bought for Rs 50 falls to Rs 25.

Had you paid fully for the stock, you would end up losing 50 per cent of your money. But if you had bought on margin, you would lose 100 per cent, and you would still have to pay interest on the loan that you took from your broker.

In volatile markets, investors may have to pay additional margin money to cover the stocks they bought on margin if the price of the stocks falls.

Another point that the investor must keep in mind is that the brokerage firm has the right to sell their securities that were bought on margin without any notification to the investor. This may result in a huge loss to the investor.

If the broker sells the stock when the prices have fallen, then the investor loses out on the opportunity to recoup the losses when the market recovers.

Some caveats

Margin accounts can be very risky and are not suitable for everyone. Investors can lose money, and may have to shell out additional cash or securities at short notice to cover for the market losses.

And since the stocks you invest in are in the possession of your broker, he can sell these without consulting you to recover the loan that he gave you.