If you are one of those planning to invest in shares but are falling short of funds, margin trading is here for your rescue. With the help of margin trading, shares can be bought by borrowing funds from a broker. This can be thought of as a taking a loan from the brokerage. It permits you to buy a lot more stocks than you can normally buy.
This is great when you cannot afford to fund the shares yourself. You can do this by paying your broker a margin that is a smart portion of the total sum of all the shares that you bought.
You can settle this margin alter after squaring off the position. You can only make a profit on your trade if the margin is lower than your profit, lest you end up losing your money. The duration of repayment, as well as the total amount of margin to be paid, varies from broker to broker. However, the foremost step in margin trading is opening a margin account of yours with your broker.
How to Open Margin Account?
For opening a margin account, start by placing a request with the broker, and for this, you may need to pay a certain amount before opening the account. This amount that is paid for opening the margin account is known as the minimum margin.
The minimum margin has to be maintained throughout your margin account. A margin account is nothing but a regular cash account where you begin trading with the money that is present in your account. Your trade will automatically be squared off if you fail at maintaining the minimum margin in your account. Squaring off is a compulsory process post every session.
As per the law, your signature is needed by the broker for opening a margin account. It may be a separate agreement or a part of the standard account opening agreement with your broker. For opening this account, a minimum of $2,000 is required as the initial investment.
However, some brokers may demand a higher sum. After your account is opened as well as functional, you can borrow as much as 50% of a stock’s purchase price.
This part of the purchase price that gets deposited is called the initial margin. One thing that you should be aware of is it’s not mandatory to margin as high as 50%. You can even go for less, such as 15% or 25%. There are also certain brokerages which would demand you to borrow even more than 50%. You should be aware of that.
The loan can be kept by you for as long as you wish, provided all your obligations are fulfilled. Firstly, when you begin selling stocks in your margin accounts, your proceeds will be going to the broker against the loan repayment till the time it gets completely paid. Secondly, you need to know about the maintenance margin as well. It is a restriction of maintaining a minimum account balance before the broker starts forcing you for depositing more funds or selling off your stocks for paying down the loan. Such a situation is called the margin call.
For instance, you start by depositing $10,000 in the margin account. Your buying power is worth $20,000 as you have gone up to 50% of purchase price. If you go on to buy stock worth $5,000, you will still have a buying power of worth $20,000. Similarly, you will have a buying power of $15,000 if you buy stock of worth $5,000. You will have enough cash for covering the transaction without having to tap into the margin. You will have to borrow money once you buy securities that cost over $10,000.
Everything comes at a price, and we all know borrowing money isn’t an exception. Sadly, your account’s marginal securities are collateral. While paying the loan, you will also be paying the interest. Your account gets charged with interests only until you start making the payments. If you don’t pay, the debt levels increase over time as the interest charges start accruing against you. The interest charges increase as the debts increase, and the cycle goes on.
Hence, buying on the margins for short-term investments is the best option. The longer an investment is held, the higher the pay-back which is required for breaking even. If the investment on the margin is held by you for a long period, the odds of you making a profit is highly against you.
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- The ability to go both short or long
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Crypto futures not just have similar features like that in margin trading but are also low in trading fees and high in liquidity. At delta.exchange, futures on the cryptocurrencies can be traded, but you cannot directly trade cryptocurrencies. It offers enterprise-grade security as well as uses multi-swig wallets for storing crypto. Moreover, to ensure higher security, it processes withdrawals just once a day and with manual review.