Advantages and Disadvantages of Margin Trading
The benefits of margin trading are like turbocharging a car. With a relatively small initial cost, margin trading makes your "engine horsepower" (or purchasing power) greatly increase, amplify and enhance investment performance.
In a bull market, this compound gain can be staggering; But in a bear market, the margin on a contract for difference (CFD) trade also supports "shorting", so you can profit from price increases and decreases.
Consider the following example:
Trader A predicts that the price of gold will rise, with an initial trading capital of £ 100. His CFD broker sets the margin for gold CFDs at 2%.
This means that A can use the initial capital of £ 100 to open A gold CFDs worth £ 5,000, calculated as follows: £ 100/2% = £ 5,000.
Assuming that the gold market is really as expected, the price of gold rises by 5%,A's trade closes at £ 5,250, and this trade benefits £ 250. In addition, the initial funds of £ 100 are still in the account.
Focus:
Margin trading gains can be magnified several times because complex and diverse investments may allow you to diversify or "hedge" your portfolio loss risk without selling your existing stocks.
Assuming your margin trading strategy works, you can also easily pay any related fees, such as interest and commissions.
If you study in depth and make proper use of margin trading, you have the opportunity to make a lot of money.
Margin Trading Risk
It should be noted that margin trading is risky and all margin loans (and interest) must be repaid regardless of the value of the securities you buy on margin.
By definition, leveraged trading means that small market movements can bring big profits or big losses, which means you should always keep a close eye on your account.
Let's look at the previous example again. If the price of gold falls by 5%, trader A loses 250 pounds. Since you only paid the £ 100 transaction fee (initial capital), the remaining £ 150 will be collected by the broker from the position margin, and you may receive a call-up reminder.
Ensuring the safety of funds
You need to pay close attention to the transaction, close the position as soon as possible when the market trend is not ideal, or set the price order in advance to ensure the safety of funds.
Keep in mind that many novice traders have too little money in their margin accounts, and in some cases this can lead to bigger losses. Preparing sufficient funds at the beginning can effectively reduce the risk of loss, because it can expand your capital security buffer.
You certainly don't want to see your trade being sold off quickly by a broker at a loss and at the same time losing out on a price rally.
Some suggestions:
- Different trading markets have different trading risks.
- Price fluctuations can be far-reaching, especially when a lot of news about the market, company or economy comes in from all directions.
- Currency fluctuations can have a huge impact on the profitability of your account or investments.
- Currency or foreign exchange markets involve some financial controls. When price volatility is too high, it is not as transparent as traditional stock and equity markets.
- Margin trading is not just for trading smaller, less well-known stocks. When used to trade blue-chip stocks, it can bring a new level of risk to the "safe" and "sound" stock market.
- Many City fund managers fail to be aware of market trends, and most ordinary investors face the same challenges and conditions.
