What are leveraged trading and margin trading?

Let's start with leverage. Leverage is an all-encompassing term when you invest with borrowed money. You hope that the profit will be greater than the interest payable you borrow, and the business may borrow several times its profit to expand the profit.

Home buyers can get a mortgage several times their income. But the downside is that if the investment fails, you will not only lose your initial capital, but you will still have to pay the remaining interest on the loan. In the case of buying a house, this creates negative equity, I .e., more money is owed to the bank than the value of the house itself.

Financial leverage

In financial trading, leverage allows you to trade in excess of the principal value with the remaining trading funds provided by the broker. This will give you more money for other investments.

Although you pay only a portion of the total value of the transaction, the profit or loss of the transaction is still calculated according to the total value of the transaction. The funds borrowed with leverage make the trading result greater than the initial capital you put in.

Investment gains or losses can be far greater than the money you put in, but in any case, you should understand the risks of trading before investing.

What is "margin" trading?

Margin is a form of borrowing funds from a broker for a larger amount of trading. In this way, investors can have more active funds to use for other purposes.

There are specific rules for margin trading, you must first establish a margin account with your broker and ensure that the account balance meets the agreed margin requirements or has other securities on deposit.

The margin rate is lower than other forms of borrowing, such as credit cards or unsecured debt.

But borrowing "margin" to trade is a high-risk investment, sometimes much higher than non-leveraged trading. If the trading situation is unfavorable, you will not only lose all the borrowed funds, but also have to repay the interest on the loan, as well as other possible miscellaneous expenses.

Highest Leverage

The leverage ratio or maximum leverage will be set by your margin broker. For retail investors on the trading platform, the leverage ratio may be 1:50. A leverage ratio of 1:50 means that you can borrow up to £ 50 from a broker for every £ 1 you have, with a trading margin of only 2%.

Due to the risk of assets, the maximum value of individual transactions is likely to be lower. For example, the maximum value for trading financial instruments that do not involve ownership of the underlying asset (e. G., CFDs) is much lower than the limit for trading stocks directly.

In order to give yourself more control over your sovereignty, you can choose the appropriate leverage to borrow funds from brokers.

Small tips on margin.

Using "margin" to trade small and large (most likely) will make you profit or lose money in foreign exchange, stocks and other financial instruments. In other words, every pot of possibility is a heavy loss.

Phronimos Group strongly recommend that you understand your trading risks and your own risk tolerance. Before you start trading, you can consult relevant professional advice.

Please ensure that your account balance meets the minimum margin requirements in case you are unable to repay your investment losses.

When your investment fails and your account is underfunded, the broker has the right to sell these securities without your consent to ensure repayment of the loan. This means that you may lose the opportunity to wait for the stock price to rebound.

Whether investing long-term or short-term, choose your trading objectives carefully. Many novice investors focus on potential gains rather than minimizing their own risk and reducing the likelihood of serious losses. It is critical to set aside funds and manage stress levels.

Don't forget, Phronimos Group strongly recommend that you first use our demo account to "test" your trading skills ". By simulating trading, you can see how small price changes can have a huge impact on your trading strategy.