Tuesday, December 10, 2013

The Essential Guide to Trading on Margin

Fundamentally, trading on margin is investing in a given asset using a loan from your broker. There are a number of advantages and disadvantages to margin trading that make it potentially worth your time, and if you’re willing to take a risk with margin calls, this should be a method of investment that you should know about. 

Here’s an essential guide to trading on margin.

Fundamental Facts

You can’t trade on margin if you have a standard cash account with your broker. Instead, you’ll need a margin account where you will need a minimum investment amount of $2,000 – though some brokers will ask you for more. This amount acts as a deposit which then allows you to make trades.

Once you’ve made an investment and closed your position, you’ll need to pay back the deposit you loaned from your broker to make the investment in the first place, and then you’re free to take the rest of the money. Of course, if you fail to be profitable, you’ll still have to pay the deposit to your broker.

Advantages of Margin Trading

One of the greatest advantages of margin trading is that it allows you to make larger investments than you’d be able to use a cash account. 

This is because you’re making an investment using the loan which you’ve borrowed from the broker. This means you could potentially make investments 2, 3, or 4 times the amount of money you actually have as capital. 

If you’re trading currencies via the forex markets, you can use this to your advantage to make substantial profits, particularly if you use a margin calculator.

Disadvantages of Margin Trading

The best advantage of trading on margin is also its largest disadvantage because large margins can lead to great losses, as well as great profits. 

If you make a loss, a very small change in pips can lead to massive losses in your own money because the margin conversion is usually high – this is what allows you to turn a couple of thousand dollars into a couple of hundred thousand dollars. 

Therefore, when you’re considering trading on margin, you should be wary of all the disadvantages before you take the plunge – you could lose large as well as win big.

Ultimately, margin trading presents an exciting, though the risky strategy of investing, so look at all the options before you open a position.

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