When starting to trade in the capital market, traders may have not only intricate questions about the most effective strategies or market entry indicators. Even such a seemingly simple question as the preferred type of account also requires serious consideration. Brokers offer different types of trading accounts, but the margin is one of the most popular. What is margin?
A margin account in its most general form can be thought of as a trading enhancer. It allows for a smaller initial investment to get more profit due to scaling. Margin trading allows you to trade with borrowed funds or the so-called leverage. The trading algorithm is as follows:
- You deposit a certain amount of money.
- Thanks to the leverage, it multiplies by a specified number of times.
- Thanks to the increased amount of money in your account, you can make much more profit.
- From this profit, you must pay a commission to the broker for providing a loan.
Margin trading has become especially popular in low volatility markets, such as Forex. In addition, it is widespread in other markets as well. Among them are:
- cryptocurrency market
- stock market
- commodity market
If a broker provides leverage when trading currencies, it can be some other person in the cryptocurrency market, for example, the same trader as you, who has larger assets.
Benefits of Opening a Margin Account
What is a margin account? Profit is increased not by conducting numerous transactions but by scaling the initial deposit due to the leverage provided. To start trading, it is not necessary to make a large deposit. This is especially beneficial for novice traders, whose inexperience can lead to large losses.
Margin trading makes it possible to open several positions with a small investment in each. Due to this, you can diversify your trading operations. If you trade on Forex, you don’t have to worry about the currency in which the deposit is made for trading operations. The broker will always provide you with a loan in the currency that is included in the currency pair you are trading.
A margin account insures against serious losses since the broker here acts as an early warning system. If you have crossed the threshold of acceptable risk, you receive a so-called margin call or warning about the forced completion of your trade if you do not fund your account.
Possible Disadvantages of Margin Trading
This type of trading is considered high-risk due to the same amplification effect since not only profits are multiplied but also losses if they occur. If you are lucky enough to open an account with large leverage, a small deposit can lead to both big wins in the market and serious losses. The latter ones occur even with a slight price fluctuation not in your favor. In this case, losses can be greater than the initial investment. Therefore, it is very important to be able to calculate risks and have an idea about how trading indicators work.
Besides that, you will have to pay interest rates on margin. It implies that greater chances for profit or high leverage imply bigger costs on servicing your account.
Summing up, it is important to note that a margin account gives a very good chance to increase your profits with a small initial deposit. However, only those traders who have sufficient experience to assess risks and knowledge of the possibility of neutralizing them will be able to use them. Otherwise, the ensuing losses may permanently discourage you from opening margin accounts. Therefore, before you try to amplify the results of your trading operations, it is important to learn how to profit from most of them.