Margin trading can be a hard-to-grasp concept for many individuals who come across it. For this reason, we will go through what it is and some of the important features, including its function and a few other important details.
Contents:
How to Get a Better Margin Trading Experience
How Does It Work?
Margin Trading Various Types
Isolated
Cross
Implementing Margin Trading
Creating an account
Adding funds
Setting up a margin order
Advantages & Disadvantages
Advantages
Disadvantages
Final Thoughts
How to Get a Better Margin Trading Experience
When an investor is interested in buying certain stock but doesn't necessarily have sufficient funds, they resort to using margin trading. This is simply a practice that enables investors to borrow money from a third-party provider also known as an exchange fund in order to make bigger investments.
The interest returned to the lender is agreed upon before the loan is finalized and the shares bought to act as collateral. This is the case especially if the investment does not prove fruitful or the loan cannot be repaid on time. Margin trading has enabled experienced investors to make fast money in very short periods of time, a feature that is bringing more players to the table.
How Does It Work?
To understand margin trading further, we need to look at a typical example. Suppose you had 10 USDT in initial funds and you applied for a loan for a 10X leverage. The third party will choose to provide 90 USDT, which you would use to buy the stocks you are interested in getting.
The amount of money you will generate will depend on the amount of success the investment makes. Remember that the prices of stock may plummet as well, meaning there is a possibility of incurring a loss.
Let’s imagine a price rose by a margin of 10%. If this was the case, you will make a profit of 100% (10 *10). This shows one of the most notable features of margin trading; it is not only very lucrative for the investor but in many cases, it can be damaging.
Margin Trading Various Types
We can identify two types of margin trading. These are isolated and cross which can be found on almost all platforms available today. The main difference between the two is the complexity associated, the former being common among inexperienced investors.
Isolated
This type of trading affords the investor the power to carry out risk management in a single position. In this variant, you can control how many margin balances will be distributed among your investments. The purpose of doing this is to significantly reduce your chances of making a loss on any investment you make especially when you run into a liquidation.
Cross
Cross margin trading involves the use of a single margin fund to supply all the positions. In this type, any losses made at one point can be corrected immediately by allocating funds from the margin account which acts as a reserve.
This type of trading is typically used by more experienced traders. Although it costs more to prevent liquidation, it provides for stability for the investment.
Implementing Margin Trading
If you have decided to use margin trading in your strategy, the next thing would be finding the right way to get started. Let's briefly look at the process:
Creating an account
Once you have identified the right exchange, proceed to its website. Here you have the option to create an account. This step is easy and self-explanatory.
Adding funds
After your account has been created and you are fully established on the platform, your next step will be to make a deposit. You will not be able to access a position without making a deposit. So it is an important step.
Setting up a margin order
After securing a position, you can either open or close an order. During this stage, you can browse over numerous assets you can invest in and proceed to make an investment considering the amount you have. The last step would be choosing the leverage of your choice and then finalizing the transaction.
The best platforms such as Finage offer cross-trading services and are well equipped to help investors take advantage of margin trading!
Advantages & Disadvantages
Margin trading has its pros and cons, knowing them before you choose to use it in your investment strategy is extremely important.
Advantages
- A large profit can be made on a small investment
- You are at liberty to pick the size of the loan
- You will learn a few tricks on how to handle risks
Disadvantages
- Complete liquidation will result in a loss of 100%
- The size of the leverage is proportional to the level of risk
Final Thoughts
One of the main reasons that margin trading is not as popular as it probably should be is that it can be very hard to implement, especially by inexperienced traders. Another issue is the risk involved as investors have the chances of losing everything.
Most of these issues can be avoided by having a proper understanding of margin trading. The knowledge acquired, if properly implemented, will lead to more wins than losses.
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