ad collaborative post // Trading in the financial market without having much money can be tough, especially for a newbie. But by trading on margin, you can take advantage of a rising market and make an excess profit. In margin trading, however, the rules differ from what is obtainable with regular trading, making it both a poison and a remedy.
You are probably wondering how a trading option that allows people without so much money in their stock account can be negative. Margin trading is supposed to be an alternative for investors with a little amount in their portfolio to make huge returns. Yes, margin trading does help with increasing profits, but it can be detrimental too due to the risks involved, which this article will discuss.
Things to Know Before You Start Trading Leverage
Before we unravel how margin trading works, it is important to know these things before you start trading margins.
- You must understand the stock market well enough before trading margins on the stock market
- Margin trading is done in other financial markets such as crypto-currency and foreign exchange.
- Only professional and experienced traders should trade on margin.
- You must understand your potential losses when trading margins.
Meaning of Margin Trading
Margin trading is borrowing money from a brokerage company to help you buy stock options in the stock market.
For instance, you know that the price of the iPhone13 will increase in the next two days. You have money with you, but not enough money to buy the iPhone13 now and resell it when the price increases. So, you take a loan from your friend to buy the phone. That is exactly how trading margins work.
In margin trading, this friend from whom you borrowed money is called a broker. The broker gives you this money and expects that you pay when you make a profit.
Benefits of Margin Trading
- Trading without having so much money is possible.
- Possibility of trading multiple times in the day by leveraging on margin.
- Helps in getting high returns from trading.
- Affords you trading flexibility with how much you can trade with.
Disadvantages of Margin Trading
- There are many risks because you can be traded out of the market quickly if the stock goes against you. Because you’re trading with more money than you have, your broker might close your account if you’ve lost close to what you borrowed.
- The interest rates can be crazy, especially when the prices of traded stocks go against you. Depending on how much they lend to you, different brokerages charge different interest margins.
- The requirements to maintain your position can sometimes mean you fund your portfolio more than you intended. When you want to open a margin position, your broker might require you to have 50% of the amount you have in your portfolio, while others require you to have more.
Regarding the margin requirement, you must have a certain margin percentage in your portfolio when trading. When entering a stock trade with a margin, the margin requirement must be there. If the margin requirement is 30%, for example, the broker is only responsible for 70% of how much you can use to trade.
Selecting a Broker for Margin Trading
When choosing a broker when you want to trade margins, be clear about what the broker requires from you:
- What is the margin requirement?
- When does the broker make a margin call?
- What are the interest rates?
After you have understood the broker’s terms and conditions, you can start trading margins in the stock market or any financial market.
The Process of Margin Trading
Leverage trading is a simple process once you have understood the risks involved. You must fund your portfolio, select the broker you want, and start trading leverages.
It is pertinent, when trading leverage, to have an effective risk management strategy in place so that you don’t lose all your money when the market goes against you.
Trading with other people’s money can be profitable if you get it right. But you can incur huge losses when you lose. Newbies are encouraged not to invest in margin trading due to the possibility of liquidating their assets. Big risk takers that are willing to earn big can leverage on margin trading. So, it all depends on how much risk you are willing to take.