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Explained for Beginners: Margin, Margin call and Leverage
Source: | Author:finance-102 | Date2022-12-27 | 147 Views | Share:
Margin in trading refers to the amount of money that a trader must have in their account to open a trade. It is a type of collateral that is required by the broker in order to cover any potential losses that may occur during the trade.

Margin in trading refers to the amount of money that a trader must have in their account to open a trade. It is a type of collateral that is required by the broker in order to cover any potential losses that may occur during the trade.

 

When a trader opens a position using margin, they are essentially borrowing money from the broker to trade. The trader must then maintain a minimum balance in their account to cover any potential losses. This minimum balance is known as the maintenance margin.

 

Margin allows traders to access larger positions than they would be able to with the funds in their account alone. This is known as leverage. For example, if a trader has a $1,000 account balance and the margin requirement for a trade is 1%, they would be able to trade up to $100,000 worth of the underlying asset.

 

However, it is important to note that margin trading carries additional risks. If the trade goes against the trader, they may be required to add more funds to their account to maintain the minimum maintenance margin. If the trader is unable to do so, the broker may close the trade and the trader may incur a loss.

 

Therefore, it is important for traders to carefully consider their use of margin and to properly manage their risk. This may include setting stop-loss orders and using appropriate position sizing strategies.

 

In margin trading, it is important for traders to understand the concept of margin call. A margin call occurs when the value of the trader's account falls below the minimum maintenance margin required by the broker. If this happens, the broker may request that the trader add more funds to their account to meet the minimum maintenance margin requirement. If the trader is unable to do so, the broker may liquidate some or all of the trader's positions in order to bring the account back up to the required minimum balance.

 

It is also important for traders to understand the concept of leverage. Leverage is the ability to trade a larger position than the funds in the trader's account would normally allow. For example, if a trader has a $1,000 account balance and the margin requirement for a trade is 1%, they would be able to trade up to $100,000 worth of the underlying asset. This means that the trader can leverage their account by a factor of 100:1.

 

While leverage can increase the potential profits of a trade, it can also increase the potential losses. Therefore, it is important for traders to use leverage responsibly and to carefully manage their risk. This may include using stop-loss orders and appropriate position sizing strategies.

 

In summary, margin in trading refers to the amount of collateral that a trader must have in their account in order to open a trade. It allows traders to access larger positions than they would be able to with the funds in their account alone, but it also carries additional risks. It is important for traders to understand these risks and to manage them effectively in order to maximize their chances of success.


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