The lack of funds is a common problem among traders. However, any trade should bring profit. In this article, we will review margin trading as one of the ways of increasing potential returns, as well as consider the risks associated with it.
Traders are looking for various options to increase their potential returns. But what can traders do if they don’t have a considerable amount of money on their accounts? Trading on margin can be one of the ways to add capital into your account. But is it a safe strategy to follow? Let’s figure it out.
What is margin trading?
There are two types of accounts that you can open with a forex broker: a cash account and a margin account.
When you open a cash account, the amount of money you put into the account equals the amount you can leverage to buy stocks. So, for example, if you deposit $1000 into your cash account, you can use this amount in total to buy stocks or securities.
It’s worth noting that not all brokers separate accounts and differentiate them as case or margin. With such brokers , you can use margin trading as a strategy within your usual account, whether it is a real cash account or a demo one. And in that case, the loan will be called leverage, a virtual credit provided by the broker to a client.
When it comes to a margin account, different rules apply.
A margin account allows you to ask your broker for a loan to increase the amount you can use to buy stocks and securities.
It means that if you deposit the same $1000 into your account, your forex broker will provide you with an additional $1000 to trade with.
So in the most basic definition, margin trading takes place when a trader borrows money from a broker to place an order.
While this strategy may seem appealing from the first look, it may be tricky, especially for the newbies in the trading market.
Let’s see why.
Well, yes, if your broker provides you with an additional loan and you make a good investment, then you will have a double profit compared with the case when you use only your money. But the dark side of margin trading is that you will experience a double loss if you make a bad investment. Sounds a little risky now, right?
What is a margin call?
Once your investment has fallen below certain limits on your account, a margin call occurs.
In the case of margin call, the broker requires an immediate correction of limits, and if you do not have money to deposit, the broker starts selling your investments at a loss.
Forex trading on margin allows traders to increase the size of their position. Margin enables traders to open trading positions with borrowed funds, giving them greater access to the markets with less initial capital costs.
However, margin trading covers considerably more risks than standard stock trading on a cash account. So, such a “game plan” should be considered by experienced traders with a high tolerance for risk.
