Introduction to Margin and Leverage Trading. Should You Choose Them?
Everyone needs a helping hand from time to time. Like an inflatable tyre keeps you happily floating in choppy waters, same is needed in a volatile market where activity never ceases.
How can margin trading and leverage help you in your day-to-day trading? Read on.
*Sage FX would like to state that traders should research extensively before following any information given hereby. Any assumptions made in this article are provided solely for entertainment purposes and not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.
- What is margin trading and how does it work?
- What does leverage mean and how can it help you?
- What are the 5 questions you need to ask yourself before choosing margin trading and leverage?
Everyone needs a helping hand from time to time. A push that keeps you afloat. Like an inflatable tyre keeps you happily floating in choppy waters, same is needed in a volatile market where activity never ceases.
How can margin trading and trading on leverage aid you in your day-to-day trading? Are they worth looking into and when should you choose to use them? In this article we will delve deeper into this subject, exploring what leverage and margin trading are, as well as weighing up your options when considering to use these tools. Let’s dive in!
So what is Margin Trading?
When a trader needs to deposit funds with their broker a collateral needs to be given. This collateral covers the credit risk that the broker goes through when placing trades on behalf of the trader. An investor may choose to borrow cash from the broker when buying instruments. Traders can also risk credit when borrowing instruments and then selling them short or enter into a derivative contract.
What Does it Mean When a Trader Buys on Margin?
Sometimes an investor needs to buy an asset by borrowing some balance from the broker. When an investor buys on margin it means that funds were transferred to the broker as payment for an asset. Then the trader uses these marginable securities in their account with the broker as securities.
It is very similar to a loan from a bank. You are able to buy more stock than you would otherwise. In order to trade on margin, you need permission from your broker and your broker needs your consent. Sage FX offers 6 different types of accounts, one of which is the Margin & Stop Level Account. With Sage FX the Margin call is 100%, offering you complete flexibility when trading with us.
Leverage. What is it?
Both leverage and margin trading are borrowing money from a broker. However, they are quite different. While margin trading is borrowing money to further invest in assets, leverage is when you take on debt.
Leveraging is when you borrow capital when opening a position. It might be that traders want more exposure with minimal equity.
How Does it Work?
Leverage is applied differently to margin trading. The broker applies leverage in multiples, that is multiplying the capital that is invested by trader. For example, Sage FX offers 1:500 leverage, multiplying the capital by 500 times. You can choose any amount of leverage, choosing to multiply twice, ten times or three hundred times depending on your requirement. You can apply this to both buying or selling positions.
What Should you Keep in Mind when Trading on Leverage?
It is important to always keep in mind that when using leverage, profits may be multiplied but losses can be multiplied as well. So it is important to keep in mind certain factors when trading using leverage.
We will go into this in our next section.
When Should You Choose Margin and Leverage Trading?
Margin trading and leverage sound pretty convenient no? They can give you a much-needed leg up in certain situations. This is definitely appealing when opportunities present themselves to you while trading on the live market and you are not willing to miss out!
So, should you choose margin and leverage trading? As any well-seasoned trader knows, risk is a constant presence on the market (and admit it, it is part of the thrill and pleasure that trading can offer you). However, is trading on margin and choosing leverage worth the risk?
It does depend on your particular situation and circumstances. We have prepared for you the below five questions you need to ask yourself when considering margin or leverage trading. They will help you better mitigate the risks that you can encounter while opting for these tools.
1. Do you Predict Significant Profits?
The potential profits that you predict must be bigger than the accumulated interest that you will pay the broker. The rates may be quite attractive but don’t forget that you can lose a chunk of your total profit towards margin.
2. Can you Afford to Lose What you are Risking?
Imagine you lose the assets you are thinking of trading on margin. Would it cause considerable harm to your pocket? If the answer is yes, then do not go for this option. There are indeed more opportunities available to you when you trade on margin, given it can increase your returns. Make sure you think twice if the risk is considerable. In contrast, think of the bigger picture and whether risking this much will yield enough profits in the long-term
3. Do you Have Cash Available to You Immediately?
Brokers may sell your securities should there be a margin call. Make sure you have funds available to you so as to avoid this happening.
4. Do You Have a Stop-Loss on your Account?
Sage FX places your security as a top priority. This is why we always recommend that you add a stop-loss order to your trades. Stop-loss orders can protect your capital especially if you do not have the cash available to you to mitigate a margin call
5. Are you Prepared for the Market’s Volatility?
The thrill of trading on a volatile market is undisputed. Not knowing where the market will take you with the endless possibilities it creates is an adrenaline-fueled activity that is unparalleled when compared to most jobs. However, make sure you are prepared for it. The more volatile the market is, the higher the risk it presents. These risks are highlighted further when you are trading on margin or with leverage.