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What is Margin trading? Opportunities and risks

Margin trading is an important concept in the financial markets, especially in forex trading. However, for many new traders, understanding what is Margin trading. and how to use it can be a challenge. In this article, we will learn about Margin, how to use Margin to increase profitability in forex trading, as well as potential risks when using Margin. By providing detailed and useful information, the Learn Forex Trading article will help you better understand Margin calls and make smart and safe decisions in financial transactions.

what is Margin trading?

Margin is the amount of exposure required to open and maintain a trading position. The margin is calculated based on the commission rate and position size. Margin can also be considered a deposit a trader makes with the exchange to secure their trading activities. If the level of leverage used in trading is high. Margin requirements will increase, so it is necessary to manage risks and manage money carefully.

Concept of Margin
Concept of Margin

For example:
Suppose you currently own 10,000 REE shares with a total value of 1 200 USD.

Your net worth structure will be as follows:

Before using Margin (USD):
– Stock value (a) 300
– Cash (b) 0
Portfolio value (c) = (a) + (b) 300
Margin debt (d) 0
Net assets (e) = (c) – (d) 300
At that time, even though you have no cash left, the securities company will lend you money to buy more shares.

Simply put, margin trading is like a mortgage loan transaction. Specifically:

The securities company lends you money to buy more shares.
The collateral is the value of the existing shares in the portfolio (in the example above, 300 million REE shares).

See more: Way to turn yourself master what is trade forex?

3 important thresholds in trading What is Margin trading?

To prevent the risk of loss when using margin. You must know the following 3 important Margin thresholds:

Margin after purchase

Although, each stock code will have a different Margin call rate of 50%, 60%…

But you can’t always borrow the maximum.

Securities companies will often limit the post-purchase Margin Margin Ratio to a minimum of 50%.

It means:

Your current Margin Ratio is below 50% and you will not be able to borrow more.

If you want to borrow more?

You must replenish the margin with money. Securities or selling off ineffective stocks to increase the Margin ratio.

Continuing the example above:
Suppose the value of REE shares decreases by 10%, and
Suppose the margin loan interest payable is 500 USD (note, the interest rate becomes larger the longer you borrow. The specified interest rate changes about 12 – 14%/year)
Then, your asset structure will be as follows:

REE stock value decreased by 10%:
– Stock value (a) 495
– Cash (b) 0
Portfolio value (c) = (a) + (b) 495
– Principal debt margin (d1) 250
– Debt interest margin (d2) 10
Debt margin (d) = (d1) + (d2) 260
Net assets (e) = (c) – (d) 235
Margin margin ratio (f) = (e) / (c) 47%
You can see:

The value of REE shares is only 495 (down 10% from 550).
In addition to the 250-margin loan principal, you also have to pay an additional 10 in loan interest.
The margin rate will then decrease to only 47%.

Important thresholds in Margin trading
Important thresholds in Margin trading

So what are the risks here?

If you do not borrow margin, your loss will be: 300 million x (-10%) = 30 million

But because you borrowed margin calls to buy stocks, the loss on the total value of the stocks increases. At the same time, you have to pay additional margin interest.

So your loss will be:

Loss from stocks: 550 million x (-10%) = 55 million.
Debt from margin interest: 10 million.
Total loss: 65 million.
Or you can quickly calculate the difference between your Net Asset Value and your Initial Investment Capital:

Specifically:

Total loss when borrowing margin = 235 million (net assets) – 300 million (initial capital) = -65 million

You can see, using margin has doubled your loss, from 30 million to 65 million.

This is the risky side of margin trading.

In the opposite direction, when the stock value increases, your profit also increases a lot (similar calculation).

Margin call

I believe you have heard a lot but don’t really understand the dangers of using margin.

They even made a movie titled Margin Call about the 2008 financial crisis.

Margin-general-khoan-la-gi-con-nen-su-dung-marginSo what is Margin Call…

This is the minimum margin ratio you must maintain.

What if the margin rate is lower than the margin call level?

Then the securities company will call or text to notify you of an additional deposit.

After 3 days, you still haven’t taken the supplement. Securities companies have the right to sell your shares to recover debt.

You can simply understand that you will be… debt-squeezed.

Margin call
Margin call

Force sell

This is the final warning threshold and perhaps the most painful.

If you follow strong market corrections, many codes fall to the exchange at the same time.

The Margin deposit ratio of many investors will also decrease sharply, reaching the Force Sell threshold.

…usually 30%

At this threshold, if you do not make a margin replenishment within the next day…

The securities company will sell the mortgage at the exchange price to recover debt.

Should I use Margin?

Using Margin in forex trading can benefit the trader. But it can also pose risks if not used properly. Therefore, before deciding to use Margin, traders need to consider and understand the risks and benefits of using Margin.

Some of the benefits of Margin include the ability to increase profits, enhance leverage, and expand trading capabilities. However, using Margin can also cause risks such as financial risks, market risks, and risks related to leverage.

Therefore, before using Margin, traders need to have a specifLearn Forex Trading plan and manage money carefully. You should limit the use of Margin if you do not have enough experience or do not have a specific plan in trading. If traders decide to use Margin, they should ensure they understand the risks and manage them carefully to ensure financial security.

Opportunities and risks when using What is Margin trading?

When using Margin, traders can encounter opportunities but can also encounter risks. Below, Self-Teach Forex will share about the opportunities and risks when using what is Margin trading.

Opportunities when using What is Margin trading?

When using Margin in Forex trading, there are many opportunities that traders can take advantage of:

Increase trading leverage

What is leverage in stocks? Leverage in stocks is basically a tool to increase traders’ accounts. With this help, a trader can open positions 1,000 times larger than the capital in the account. In other words, this is a way for traders to trade with volumes many times larger than their existing balance.

Expand trading capabilities

Scalability is a measure of a system’s ability to increase or decrease performance and cost in response to changes in application and system processing demands. Characteristics and meaning of scalability?

Take advantage of short-term trading opportunities

Margin helps traders take advantage of short-term trading opportunities effectively. Short-term investment is a form of financial investment with a capital recovery period of less than 1 year. Short-term investments help you circulate money and make profits quickly.  

Easily generate profits

With Margin, traders can easily make profits from small trading positions. Profit is the difference between a business’s revenue and the costs they spend in the production process. Profit is the final financial result of a business. At the same time, this factor also becomes the basis for evaluating the performance of each business.

Control transaction costs

Margin helps traders control trading costs while minimizing transaction fees.

However, traders need to clearly understand the risks associated with Margin to be able to take advantage of these opportunities safely and effectively.

See more: Opening and verifying an ICMarkets account

What are the risks when using what is Margin trading?

When using What is Margin trading? There are many risks that traders need to pay attention to:

Financial risk

If traders use Margin carelessly, they can lose more money than their initial deposit, which can lead to serious financial losses.

Market risks

The foreign exchange market is highly volatile and unpredictable, so using Margin can be risky. In general, market risk is the possibility of suffering a loss in business when the market fluctuates and changes in the opposite direction compared to the bank’s prediction. The main risk factors in the market are determined through differences in interest rates, exchange rates, securities, and commodity prices.

Risks related to leverage

With Margin, leverage also increases, increasing the possibility of profit, but also increasing the possibility of losing money and risk. The most important risk associated with leveraged trading is the fact that similar to profits, losses also increase when the market moves in the opposite direction to the assumed. Leverage may require minimal capital expenditure but because trading results are based on the total size of the position you control, losses can be quite large.

Exchange rate risk

Exchange rates can change rapidly and unpredictably, which can lead to the risk of large losses. Exchange rate risk or exchange rate risk is the risk caused by changes in the value of currency. It is based on the influence of constant changes and frequent fluctuations in the balance of supply and demand around the world. For as long as the trader’s position remains active, the position is subject to any changes in price.

Legal risks

Regulations and laws regarding Margin trading may change or differ between countries, traders need to be aware of it to avoid violating the law.

Therefore, using Margin in foreign exchange trading requires caution and professional understanding to avoid the above risks and ensure safe and effective transactions.

Risks when using Margin
Risks when using Margin

In addition, to limit trading risks, investors also need to learn more about related issues. Such as what is price action and what is short selling, which not only helps increase knowledge but also assists on the path to profit.

Epilogue

In the article on Learn Forex Trading, we shared with traders what is Margin trading and related information. Margin is the deposit amount that a trader must have in his account to open. And maintain trading positions. Using Margin calls can provide opportunities to increase profits. Increase leverage and expand trading possibilities. However, it also brings risks such as financial risks. Market risks and risks related to leverage.

To ensure financial security when using Margin, traders need to have a specifLearn Forex Trading plan. And manage risks carefully. If the trader does not have enough experience or does not have a specific plan. They should limit the use of Margin.

One of the ways to minimize risk is to use risk management tools. Such as automatic stop loss and take profit. In addition, traders should also clearly understand the factors that affect market prices. And keep a calm and objective mentality in trading.

Thus, using Margin is a useful tool in forex trading. However, traders need to use it carefully and understand the risks involved to ensure financial security and achieve the best trading results.

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