If you consider yourself a daring market operator and you’re currently looking for more unorthodox ways to enlarge your wallet, give margin trading a go. We have no doubt you’ll find it titillating. But first, we need to learn a little more about it and how to use it — here’s our margin trading guide.
What is Margin Trading?
So, margin trading is basically the act of trading using borrowed funds. Say you wanted the newest ‘fancy smancy gizmo” in the store but don’t have enough cash on hand to purchase it. You have two options: don’t buy it, or ask your friend to float you a loan so you can buy the gizmo, and then pay them back later. This is called margin trading.
Step 1: Learn the Basics
Before diving in, get familiar with some key terms:
- Margin: This is the money you put down yourself (like a deposit).
- Leverage: The leverage represents the fraction of borrowed funds in comparison to your own money (money that you own). For instance, in 1:2 leverage a trader has to provide half of the transaction value, and the other half of the value is a loan.
- Liquidation: If your position goes south and your account equity falls below the margin maintenance level, the brokerage will seize your assets to mitigate losses and cover the money you borrowed.
Step 2: Choose a Reliable Broker
You really can’t do this margin trading without a reliable broker, so that’s a good place to start. Look for one that suits you. You would obviously want to check their fees and leverage limits and look at user reviews. A smart user interface might also save you some time and effort!
Step 3: Open an Account
Now it’s time to open that oh-so-important account. This involves filling up some forms and, in some cases even an ID verification. They would inquire about your trading experience as well. They don’t want you to gamble away your house.
Step 4: Fund Your Account
Now, it’s time to make a deposit. Be sure to add enough money to cover the desired trade and initial margin requirement of your broker. The margin requirement can be some percentage of the desired size of your trade.
Step 5: Familiarize Yourself with the Platform
Get to know your margin trading platform so you can navigate it like a seasoned pro. Check if it provides charts, order types, news feeds, or analytical tools. As it concerns stock margin trading software, you can check Interactive Brokers. And be sure to practice because “practice makes it perfect“. If a broker offers the practice account, feel free to try it before you trade using your money. It will just make you feel more comfortable.
Step 6: Start Small
If a margin trade is something you want to do, you have to play it safe at the beginning and take a smaller margin. That way, you reduce risk while gaining experience.
Step 7: Monitor Your Trades
Margin trading can be very dynamic, and that’s how it can be very volatile. Try to follow up on what is happening with your trade and how the market behaves and make informed decisions. Consider using stop-loss orders to help you set your margins and stop losing any capital.
Step 8: Know When to Exit
Don’t get too attached to a trade. Be ready to get out at the first whiff of things going south.
Stay Educated and Patient
So that is how you can begin margin trading. It really gives a high and sounds exciting when the rewards are so great but maintain equal trepidation for the risks. Happy margin trading!