Our great exchange keeps on growing and improving. Our goal is to keep offering our beloved traders all the instruments and options that they might want, hence we aim to add lots more in the future. We’re currently working on all the bits and bobs and techy stuff to be able to provide the option of margin trading for you in the future. If you don’t yet know what margin trading is, keep reading I’ll explain it all.
What is margin trading?
Margin trading is a high risk strategy and it can yield a huge profit if your predictions are correct. On the flipside you can lose more than your initial investment if it goes out of the money for you. Margin trading is one of the riskier trading instruments so we urge you to do a lot of research and practice before diving straight in.
Buying on margin is essentially borrowing money from your broker to purchase an asset, commodity, stock or currency. This way you can buy more than you’d normally be able to afford at one time making way for opportunities to profit more in a shorter amount of time. For example if you have a clear indication or idea on where the price of an asset is going you can try a margin trading strategy.
Let’s try and explain this in the real world:
You buy a share in a company for $1000 using $200 of your own money and $800 borrowed from her broker. The net value (the share price minus the amount borrowed) is $200. The broker wants a minimum margin requirement of $100.
Suppose the share price drops to $850. The net value is now only $50 (the previous net value of $200 minus the share’s $150 drop in price), so, to maintain the broker’s minimum margin, you’d need to increase this net value to $100 or more, either by selling the share or repaying part of the loan. Going the other way – Let’s say the price of the share doubles making it $2000 – you now sell the share, pay back $800 owed the broker (there will be some fees and interest charges on top of this) keeping $1200 of the transaction.
As it is essentially borrowing money, you also need to understand that it comes with a cost – there will be interest and there can also be fees and or charges. Your bought assets are used as collateral. As the debt increases, so will your interest charges – just as they would with a conventional loan. Therefore when you are buying assets on margin, it is generally a better idea to do it on short-term investments. The key is to profit fast and get out. The longer you hold an investment the smaller the odds of making a profit get, due to the increasing charges.
Margin trading is great when you have some inside info or insights into what an asset’s price might be doing. Especially great when trading cryptocurrencies and bitcoin due to their volatility. We cannot stress this enough though – margin trading is a lot riskier compared to traditional trading. Do practice and get comfortable in your trades before jumping in. Luckily you can do that on our demo account!
We would love to hear what other financial instruments you’re interested in. Let us know in the comments!