On Margin Trading

Margin trading means that you do not need to pay the total price of the traded assets. On the contrary, you only need to pay a certain percentage of the value of the underlying asset, and the remaining funds will be provided by your broker.

Margin trading allows you to gain more investment returns when correctly predicting market trends, and may also result in greater losses when predicting the opposite. Using the "stop price list" of financial bodyguards can effectively control your losses, but before starting trading, please read the following basic requirements.

Type of margin

Firstly, let's take a look at the concept of initial margin. There are many different names for margin, including 'deposit margin', which stands for initial deposit. The deposit margin should meet the minimum requirements for opening an order and reserve a certain amount of funds to repay potential losses or stock price fluctuations.

The key is that if you fail to recharge your account when needed, your broker has the right to manage or sell the assets in your account to repay your debt. You may lose all your funds and even owe the broker more.

Position margin

If the trading trend is unfavorable, you may need to continue to top up your position margin (sometimes referred to as the "minimum position margin"). The holding margin should be sufficient to cover potential financial losses.

Require margin

The funds required to open a transaction are required to have a margin or margin requirement.

The specific amount of margin required depends on the asset you choose. The calculation method is the percentage of asset prices, known as the margin ratio.

In CFD trading, the margin ratio for indices and popular commodities such as gold may be 2%; 5% for popular stocks; High risk stocks account for 20%.

If you open multiple positions (many different trades) at the same time, the sum of the required margin for each trade is your used margin; The other funds in the account used to open new positions are called available margin.

Warehouse explosion warning

If a transaction goes against your expectations or if several transactions do not perform well, you may face the possibility of losing all required margin (used margin), which means the loss will affect your position margin.

If your position is still open, i.e. still trading, then these losses are only theoretical; When the market trend turns, you may regain assets and make profits.

However, as transactions are usually electronically monitored, your broker may require you to deposit and maintain margin as a precautionary measure. This situation is called margin call, and once your position margin drops below the amount set by the broker, it may trigger a margin call reminder.

When the position margin drops to 80%, you will receive a replenishment reminder; When prompted, you should recharge your margin account as soon as possible.

Automatic liquidation

If you fail to replenish your position in a timely manner after receiving the margin call notice, or if the loss of your position gradually exceeds the replenishment amount and the margin of your position is lower than 50%, your broker will begin to take liquidation measures.

This means that your broker will settle your position at the best market price at the time, and you will miss the opportunity to wait for a trading rebound, resulting in the position being closed at a loss.

The worst-case scenario is that the overall price of your assets drops rapidly. For example, a company's announcement of termination of contract with its largest client may result in a 50% drop in stock price within a day.

When the number of buyers is too small, your broker may have to sell some small batch products at a low price or at a loss, which will make your loss situation more complicated.

If your broker does not provide guaranteed stop loss, you may end up in debt while losing all of your position margin. Before starting trading, please ensure that the broker you choose has this safeguard mechanism in place.

The advantages and disadvantages of margin trading

The value of a margin account is that it allows you to have some activity funds in addition to conducting large transactions; In addition, whether the stock price rises or falls, you have the opportunity to invest and make profits.

If you have sufficient funds in your margin account, you can choose to hold a position and wait for the stock price to rise; On the contrary, you will suffer financial losses due to the broker's automatic liquidation.