{"id":891,"date":"2023-12-18T13:54:09","date_gmt":"2023-12-18T13:54:09","guid":{"rendered":"https:\/\/bigshotrading.info\/?p=891"},"modified":"2023-12-18T13:54:18","modified_gmt":"2023-12-18T13:54:18","slug":"margin-trading","status":"publish","type":"post","link":"https:\/\/bigshotrading.info\/blog\/margin-trading\/","title":{"rendered":"Margin Trading: Disadvantages, Advantages & Details"},"content":{"rendered":"\n

Margin trading (aka trading on the margin) is one of the riskiest strategies you may employ while trading. It\u2019s essentially investment with the borrowed funds, which has the potential to break you completely if you are not careful. However, it also has the potential to bring you huge profits without risking your own money.<\/p>\n\n\n\n

\"Margin<\/figure>\n\n\n\n

That\u2019s chiefly what brings so many people into margin trading \u2013 the opportunity to fuel your strategies and schemes with increased capital. Who cares if the funds are borrowed from someone? Your scheme will surely rip exponential gains, and you\u2019ll repay the debt immediately.<\/p>\n\n\n\n

It\u2019s obviously a double-edged sword. Let\u2019s examine this strategy thoroughly, then. So, what is margin trading?<\/p>\n\n\n\n

Margin Trading Explained<\/strong><\/h2>\n\n\n\n

In the usual course of trading, you pay money to buy an asset, wait for it to grow in price, and sell it for more. That\u2019s how most people trade, and it\u2019s a perfectly reasonable approach with its moderate ups and downs. <\/p>\n\n\n\n

Trading on margin, by comparison, is a much riskier method. It can bring huge profits, but also proportionally huge losses. It is the case because trading this way doesn\u2019t just mean you can borrow money and be neglectful about returning it. Brokers lay provisions so that you would be forced to pay back if you aren\u2019t even anywhere near broke.<\/p>\n\n\n\n

You have to create a special account to be able to trade on borrowed funds. They usually admit you to the club if you have a good-enough trading history and some funds and securities in your normal account. If you have a margin account, they can give you a loan, but only in proportion to the actual funds you want to commit to margin.<\/p>\n\n\n\n

This proportion is called \u2018leverage\u2019, and different brokers offer different leverage ratios. 1:100 (your funds to margin) is common enough, but there are also huge ratios of 1:1000, 1:10000, and more. Don\u2019t try them; it\u2019s not a good idea. Even 1:10 is more than enough. The rest is just goose chase \u2013 not worth the trouble.<\/p>\n\n\n\n

Margin Account<\/strong><\/h2>\n\n\n\n

Many brokers have their own margin accounts. They are additional accounts where you can manage your margin funds. Usually, you\u2019ll need some experience and background with the broker if you want to sign up for some margin trading. Some less-than-trustworthy brokers give it to just about anyone, which is a sham.<\/p>\n\n\n\n

If you are given a margin account, you\u2019ll need to do the following to start margin trading:<\/p>\n\n\n\n

    \n
  1. Deposit a sum of money to this account<\/li>\n\n\n\n
  2. Pick a leverage option to decide how much money you want to borrow<\/li>\n\n\n\n
  3. Receive your borrowed funds<\/li>\n\n\n\n
  4. Start trading.<\/li>\n<\/ol>\n\n\n\n

    Now, the minimal amount for most certified American brokers is $2,000. So, if you deposit a minimum amount and pick leverage of, say, 1:1000, you\u2019ll have $2,000 of your own money + $2,000,000 from the broker. This amounts to $2,002,000, and you probably see why it\u2019s not too feasible.<\/p>\n\n\n\n

    The $2,000 in itself is a sizeable sum in the right hands, and you basically take a huge bonus from the broker that you\u2019ll need to return. The percentage of your own money in this vastness is minuscule. It creates a giant rift between your actual resources ($2,000) and what you can do now with two million.<\/p>\n\n\n\n

    Opting for 1:10 is a much more reasonable option. Considering that you need to first earn at least $2,000 to start margin trading, it means you already have some experience, and an additional $20,000 will do you good if you have a sound strategy of spending them.<\/p>\n\n\n\n

    Margin maintenance<\/strong><\/h2>\n\n\n\n

    In addition to your own funds and the leverage, the usual margin funds consist of another chief part. Perhaps, it\u2019s actually more worthy of attention than the other two because it needs to stay intact no matter what.<\/p>\n\n\n\n

    This part is called margin maintenance, and it\u2019s basically a bail that you can\u2019t move anywhere until you paid back your debt. In America, it legally comprises 25% of the full margin. So, if you end up having $22,000 with the 1:10 leverage, it could be broken into:<\/p>\n\n\n\n

      \n
    1. $2,000 trader funds<\/li>\n\n\n\n
    2. $20,000 margin<\/li>\n\n\n\n
    3. $5,500 maintenance<\/li>\n<\/ol>\n\n\n\n

      If it doesn\u2019t add up, then it\u2019s correct. You can allocate the maintenance to each part however you wish, but your account always has to have one dollar above $5,500. What it means for you is that the actual usable money you borrowed is only worth $14,500. The rest should be given to maintenance.<\/p>\n\n\n\n

      Whatever you do, the ultimate usable margin will be much smaller than what you have in your margin account. So, if you wanted to invest a specific amount of money, you might want to deposit a bit more capital so that the margin would grow proportionally to finances that you can actually use for trading.<\/p>\n\n\n\n

      What if I go below the maintenance?<\/strong><\/h2>\n\n\n\n

      Going below the maintenance level is one of the worst things that can happen to you if you have already lost the money you borrowed from the broker. If you spend more than what the minimum allowed value is worth, you\u2019ll receive a margin call<\/em> from the broker.<\/p>\n\n\n\n

      Margin call states that you need to replenish the supply of money back to the maintenance point within several days. If you do that, the margin call is nullified. If you fail, the broker may start to forcibly sell the shares in your possession to pay back the debt.<\/p>\n\n\n\n

      If you are currently in the middle of a lucrative trend, you can try negotiating the situation, but more often than not they\u2019ll just sell whatever you have when the time is up. That includes the stock you bought with the margin, so you have to be careful and make sure you have just enough maintenance.<\/p>\n\n\n\n

      Other dangers of margin trading<\/strong><\/h2>\n\n\n\n

      There are other risks associating with this sort of investing, besides just maintenance. Some of them include:<\/p>\n\n\n\n

        \n
      1. Margin interest. You need to pay various sorts of interest regularly after you take on debt. The funniest thing is that they can pay the interest using your maintenance if you don\u2019t have anything else on balance.<\/li>\n\n\n\n
      2. Expiration date. Many assets acquired on margin have an expiration date. If you don\u2019t close the position before it, you\u2019ll have to close the position.<\/li>\n\n\n\n
      3. Premium options. If you are trading options on margin, you\u2019ll have to pay double the premium for safety.<\/li>\n<\/ol>\n\n\n\n

        There are many more additional costs for various types of products. The broker usually provides a list of assets that can be traded on margin, alongside the specific costs they made up for each sort. Margin trading is not a stroll in the park, as you see, because you are very much responsible for borrowing money. <\/p>\n\n\n\n

        The biggest threat to your sanity is still the interest. The exact rate can vary based on the type of product, the size of the margin, and other requirements. It can also change dynamically in some cases. In short, you need to be sure you have more money on balance to cover the interest costs.<\/p>\n\n\n\n

        Actually, you might want to reduce your actual usable margin even more to delegate a portion of money solely to interest.<\/p>\n\n\n\n

        Advantages of margin trading<\/strong><\/h2>\n\n\n\n

        Some of the more apparent disadvantages are obvious. But after so much talk about issues with margin, what about benefits? There are a few very tangible benefits, actually.<\/p>\n\n\n\n