As a stock investor, you can borrow money to increase buying power, just like in every other regular business in the world where you can purchase a house or other luxury items you can afford.
This process involves leveraging your capital which is called ‘margin trading’ by experts. The characteristics that influence this kind of trading include brokerage account type and balance.
As a first-timer, you probably have questions that need answering. Questions like, are you making the right choice borrowing money to invest in stocks? And, what are the advantages and disadvantages of margin trading?
What Is Margin Trading?
Margin trading involves getting a loan from your brokerage then purchasing more securities that you can afford with your available fund while using the loan. With margin buying, investors can amplify their returns, and they also stand to enjoy some returns if their investments outperform the cost of the loan after the payment of it.
From another angle, investors can potentially lose money faster when they invest via margin loans than when investing with cash.
According to Steve Sanders, executive vice president of business development and marketing for Interactive Brokers Group “Margin is essentially a loan that you take to get more leverage in your investments.”
History of Margin
One of the greatest moments in the history of the financial world is known as the “Roaring Twenties.” This market boom was right before the Great Stock Market Crash of 1929, whose margin requirements were just 10%.
The return on investment was attractive. People were highly deceived, and most investors started chasing the bull market. Then the Great Depression came. The dip was so massive that investors rode on margin trading. Most investors lost their capital and were kicked out of the stock business.
To date, the Great Depression has many stock investors re-examining their plans.
Margin Trading in Cryptocurrency Markets
In cryptocurrency, margin trading is riskier than regular cryptocurrency trading, and this is even much harder than margin trading with stock.
One of the risks is the high levels of volatility typical to these crypto markets. Cryptocurrency margin traders may or may not be used to the market’s volatility, but still, they should be cautious.
This kind of trading is not beginner-friendly. Even as an experienced trader, you need to develop your risk management strategies, because you will definitely need them.
In addition, you will need to study charts, identify trends, and pinpoint entry and exit points. Although knowing all these won’t ultimately safeguard your investment, it will reduce your chance of making trading errors and improve your trading skill. This reason is why you have to study and understand everything about technical analysis (TA) and gain trading experience from other experienced traders. Also, an understanding of how to read candlesticks can be beneficial in the long run.
Most of the crypto exchanges that offer trading on margin make use of amounts and interest rates for margin trades based on location or country. Some exchanges charge annual interest while some other charges hourly loan rate interest.
In contrast to what most people think, they sometimes think they can trick the exchange like choosing a country different from their location because of the charge on their site. This misconception is wrong because the details on the Know Your Customer (KYC) and Anti-Money Laundering (AML) must be the same on your form for a loan.
Margin Calls Are Important
A margin call serves as a backup to recover both your interest and capital if changing your trade results in a loss. A disadvantage of a margin call is that you also get a margin call to deposit assets to boost your account to a particular level, e g., to the minimum requirement. If you fail to carry out the instruction, the broker has the authority to liquidate all or some of your assets without notifying you.
Benefits Involved in Margin Trading
There are benefits involved in margin trading, one of which is profit. Through well-strategized margin trading, you can amass enormous profit due to the excellent relative value of the trading positions.
It is helpful for diversification. Traders can open several positions with relatively small amounts of investment capital to manage the risk involved in trading.
Finally, a margin account can make it easier for traders to open positions quickly without moving large sums of money to their accounts.
The Disadvantages Of Margin Trading
Margin trading can make a trader amass losses that are greater than the trader’s initial investment, and so, it is said to be a high-risk trading method.
The amount of leverage involved in a trade is highly dependent on the market price. A slight dip may cause substantial losses for traders, like in the case of the May crypto crash, which wiped out over $1 trillion worth of crypto investments. Margin traders were the most affected as most of their crypto investments were liquidated within minutes.
To reduce risk cases, investors must employ proper risk management strategies and use risk mitigation tools, such as stop-limit orders, when using margin trading.
How To Create A Margin Trading Account On Binance
You can trade assets using crypto funds on Binance. With Margin trading, you have access to an enormous amount of crypto as capital for investments for a borrowing fee.
Log in to your account
Click on [Trade], and then click [Margin]
If you are just starting out, watch the tutorial video to understand margin trading better.
You can now take the quiz. You must answer all questions correctly to open a Binance Margin Account.
Buying on margin has both advantages and disadvantages, and it can increase profit potential. As a cryptocurrency trader, you should also be mindful of the risk involved.
In addition, you should know that leverage attests to gains and losses. One risk you should be prepared for is that a broker may issue a margin call unexpectedly!