Make Bigger Trades With Margin

“When you combine ignorance and leverage, you get some pretty interesting results.”

- Warren Buffett

Extend the Reach of Your Money

The online trading industry is unique in the sense that investors have the unprecedented ability to trade more currency pairs and asset classes than ever before. More importantly, this era of streamlined investing is even more potentially valuable thanks to the introduction of margin trading. So what exactly is margin trading?

Margin trading describes borrowing funds from a broker to expand the size of an investment further than your available capital. For instance, if a broker has a 10% margin requirement (equivalent to 1:10 leverage), to buy a $100.00 stock you would need to post margin of only $10.00 instead of spending $100.00 outright to hold the stock.

To think about margin outside the confines of financial markets, imagine that you own and operate a vending machine in a 10-story office tower. You own the vending machine and it sits on the 1st floor where it serves customers. Now, imagine that the vending machine company allows you to borrow the funds for another nine vending machines by using your own vending machine as collateral.

The beauty of this offer is that you can now put vending machines on each floor, using the existing vending machine as margin. While adding vending machines increases the potential to earn greater income, it also represents a bigger risk if potential customers don’t purchase goods from the vending machine.

Simply put, margin is the ability to control a larger amount of capital by employing only a fraction of your own investment funds.

Find More Opportunities for a Fraction of the Cost

Now that we understand what margin trading is, let us take the next step and understand another key term: leverage. Leverage is a ratio that expresses how much margin an investor must post in order to open a trade. Trading leverage at FXTM ranges from 1:10 to a whopping 1:1000*.

Determining the margin needed to open a position involves dividing the price of an asset by the leverage available. For an investor interested in trading stocks, an FXTM Shares Account grants fixed leverage of 1:10, meaning that a $100.00 investment gives the trader the equivalent buying power of $1000.00 ($100.00*10).

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How Could Margin Help Grow Your Wallet’s Potential?

Margin trading can work for you; margin trading can work against you. To effectively harness margin trading’s potential, it's important to understand the advantages and risks of using margin. Consider what leverage really does for traders in general with the following example.

With $1000.00 in investment capital and leverage of 1:100, forex investors can take advantage of price movements for $100,000.00 worth of a currency pair. That gives traders a big advantage when it comes to realizing substantial gains from small price movements. On the flip side of margin trading, utilizing high leverage can also work against you. When trades don't move in your favor, the size of the loss is also magnified because of the leverage.

However, when used judiciously, a margin account can be an effective tool to hedge or diversify your investment portfolio. For example, your margin account can be utilized to spread your investment capital across many asset classes simultaneously like foreign exchange, stocks, commodities, and more. Apart from expanding the buying power of your account’s capital, margin trading can help diversify the risks of your investment portfolio.

Additionally, if you already have built a diversified portfolio and wish to protect against downside risk, you can utilize margin to establish trades in the opposite direction (short-selling) that offset the possibility of extensive losses if the market moves against your portfolio.

Some Important Margin Concepts to Consider

When you trade on margin, you can establish much bigger trades than you otherwise could with your existing trading capital. If your available leverage is 1:50 (2% margin), you can control $5,000.00 in buying power with just $100.00 of investment capital. The remaining 98% is borrowed from the broker. The margin (amount required to open a trade) is kept as security in case the price of your investment asset falls.

The accompanying price movements in your trades can result in larger profits or larger losses when compared to an unleveraged position. However, it is important to keep close watch over your account when using margin trading due to the “margin call.” This occurs when the amount of money in your account cannot cover losses on an open trade. If that situation occurs, a margin call will be sent from the broker. This will result in some or all of your open positions being closed at the market price unless you immediately deposit additional capital to your account to cover your open trades.

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*The leverage and margin requirements mentioned in this article are only applicable to FXTM clients who reside outside the EU and UK. Please go to our site for more information.