At first glance, the world of margin trading appears overwhelming. With terms like “minimum margin,” “initial margin,” and “margin call” casually thrown around, it’s natural to think you’d never get the hang of things.
Yes, trading on margin is risky and might not be suitable for everyone. But that doesn’t mean you shouldn’t give it a try. Follow this beginner-friendly guide to understand what margin trading is and how you can get started:
Understand What Margin Trading Is
First things first, know what margin trading is. It involves borrowing funds from a broker to acquire more assets. Margin, itself, is the collateral you will deposit with brokers to cover potential losses.
The result? You can control a much higher position than your own capital would have allowed.
Next, compare the pros and risks of margin trading to make an informed decision. For instance, the benefits of margin trading include:
- Greater purchasing power
- Increased profits
- Greater flexibility compared to other loan types
- Portfolio diversification
On the flip side, the cons of margin trading include:
- Risk of amplified losses
- Additional account fees and charges
- Possibility of margin calls
- Possibility of forced liquidation
Know the Elements of Margin Trading
You should also have a complete understanding of the different elements of margin trading. This includes:
Minimum margin – the initial investment required to open a margin account. This can start from $2,000.
Initial margin – this is the minimum amount of collateral, usually cash, that a trader must deposit with their broker to open a leveraged trading position.
Maintenance margin – this is the additional amount you would have to deposit if a position moves against you.
Know How to Manage Risks
Margin trading is a risky activity. If the market moves against you, either due to inflation or market regulations, your capital will be at risk. In some cases, you would get a margin call and will be required to deposit additional funds (maintenance margin).
To handle such a situation, you need a robust knowledge of risk management. Learn how stop-loss and take-profit orders work. They will protect you from losses and sudden fluctuations.
Open a Margin Account and Fund It
Once you know the ins and outs of margin trading, open an account with a trusted broker. Complete the margin application and sign an agreement.
With a standard cash account, you can only trade with the money you have in your account. This is why opening a specialised margin account is necessary. Deposit the minimum margin or other margin-eligible securities to get started.
Start Trading
After funding the account, you can choose stocks or other financial instruments. Just pay the required initial margin, and the broker will handle the rest.
Remember that the borrowed funds are subject to daily interest charges. And if the market moves against you, your securities will serve as collateral.
Manage Your Account
To keep doing margin trading, maintain a minimum balance. This will keep your account active.
Santosh Kumar is a Professional SEO and Blogger, With the help of this blog he is trying to share top 10 lists, facts, entertainment news from India and all around the world.
