Margin Trading

What Is Margin Trading?

Margin trading is the process of trading an investment portfolio using loaned funds from a broker, which serves as security for the broker’s loan. A margin is the amount of money that an investor must pay with their broker or exchange to cover the credit risk that the holder provides to the broker or business. When an investor borrows cash from a broker to buy financial instruments, borrows financial instruments to sell them short, or enters into a derivative transaction, they take on credit risk.

Deeper Definition

Margin trading is a type of trading that has risen in popularity in recent times. This is a result of retail traders who participate in the financial market. Margin trading is often associated with day trading, but it does not mean they are the same. Margin trading permits traders to buy more commodities than usual. To trade on margin, you need a margin account. This is different from an ordinary cash account, in which you use the funds in the report to conduct transactions.

The amount that can be borrowed by margin trading is affected by the leverage. Higher leverage would equal higher margin, while lower leverage would equal lower margin. Leverage usually comes in ratios; you can have 1:10. This means for every of your $1 in your account, your broker would borrow your x 10 of it for trading. The same thing goes for 1:1000.

Leverage can be helpful when you are gaining and very harmful when losing.

Depending on leverage, you can borrow up to 50% of the purchase price of the stock. The part of the purchase price you deposit is called the initial margin. It is essential to know that you do not have to maintain a margin of up to 50% all the time.

Margin Trading Example

Margin trading exists in all financial markets (Forex, Stocks, and Crypto)

Assuming you want to buy a commodity in the financial market at, let’s say, $500, and you only have $400 in your portfolio. Margin trading would allow you to buy such a commodity. Depending on leverage chosen, probably 1:10. Part of the money will be from you and the other from your broker. In this case, $50 would be taken from your account to purchase the commodity while the broker will supply the rest.